WASHINGTON, May 22, 2017 – As we’ve noted in our companion column, stock market action today is back in its happy place, at least for now, as stocks in general seem to be reacting warmly to the big deals President Trump is cutting with our once and future allies in the Middle-East.
Largely involving weaponry and hardware, the billions of dollars in deals announced over the weekend will bring joy to the greedy hearts of defense contractors as well as the countless companies small and large that will supply these mega-vendors with the parts and technologies underlying these deals. The industry may very well get tired of all the winning.
Nonetheless, despite the weekend’s economic happy talk, we remain skeptical of this skittish market, though we’re always looking for deals.
One type of deal that will occasionally bypass our “Sell in May” filter here is the unicorn-like “attractive IPO.” In other words, we continue to look for IPOs that, for at least 31 days, can give us at least a modest profit in the current volatile trading climate.
We’ve done pretty well with IPOs in 2017. Our latest two IPO holdings, for example – new master limited partnership Hess Midstream Partners LP (trading symbol: HESM) and oil and gas flow control and compression equipment vendor Gardner Denver Holdings (GDI) – have been up sharply since we bought them. We continue to hold both, HESM because we want to and GDI because we have to, as we’ll explain next.
Under our discount brokerage house’s rules, however, if we buy any IPO shares, we’re more or less required to hold them for at least 31 days before we can get rid of them. That means we can’t “flip” them like the big, rich guys routinely do, without incurrent a penalty, in that we’re not allowed to bid for any more IPOs for 6 months. It’s an irritating policy, but there are good reasons for it, which, however, we won’t get into here because it involves minutiae you’re probably not interested in.
Bottom line, however, is this: Under this constraint, we tend to get interested only in IPOs we think can survive the 31-day holding period by staying at least modestly in the green for that period.
One example of this is Snapchat’s parent company, Snap, Inc. (SNAP). We detested this IPO for reason’s we’ll shortly explain. But we put in for it anyway and were able to purchase a small position. The stock backed and filled throughout our 31-day holding period, though its ability to remain positive was probably due to a cadre of inexperienced millennial buyers who picked up shares because they liked the product. (That’s nearly always a wrong answer, BTW.)
We dumped our SNAP shares for a very modest profit not long after our 31-day hold expired. Last week proved our point, as the company reported dismal quarterly results, causing the stock to tank considerably below its IPO price. But we were long gone.
Part of the reason we hated SNAP shares was due to the arrogance of its CEO, who chose to peddle the shares of his company’s IPO without any voting rights at all for his new public shareholders. In other words, he wanted investor money. But in return, new public shareholders would be awarded with
- No dividend at all for the foreseeable future
- Absolutely zero voting rights attached to the company’s new publicly traded shares
Although a great many small shareholders never bother to vote their shares, it’s still important for them to have voting rights anyway, particularly when it comes to countering malfeasance by corporate officers or board members or grossly poor performance by the company’s shares, generally due to poor corporate management.
But with SNAP shares, management’s attitude toward new shareholders seemed to be, “Send us your money, and then STFU.” (That’s a term you’ll find in the Urban Dictionary here in case you’re not familiar with it.) We don’t like that kind of corporate hubris and/or contempt for the public.
That’s why we held our nose when purchasing those SNAP shares, and it’s why we dumped them quickly thereafter. Sure, the stock may do well some day. But I personally detest the idea of making an investment in any entity where I don’t have at least a nominal say. You should, too.
Which brings us back to Appian (proposed symbol: APPN), whose offering is briefly described here by the Washington, D.C. edition of BizJournals:
“Reston-based software developer Appian Corp. has filed for an initial public offering and is looking to raise up to $86.25 million, according to a Securities and Exchange Commission filing.
“Appian, long considered a likely IPO candidate, is the first Greater Washington company to file for a public offering in 2017. That follows a tepid year in 2016that saw only five IPOs, down from 11 the year before and eight in 2014.”
Based just down the street in this writer’s current home town, Appian, like most tech IPOs, has yet to turn a profit, but it’s operating in an area that’s proved profitable for other companies. That could be a good thing or not, as a short “Seeking Alpha” piece on this IPO duly notes:
“Appian has significant competition from large, entrenched players including:
SAP SE (SAP)
“ServiceNow and Salesforce are considered direct competitors, as their solutions are also considered ‘low-code’ type systems.”
“One competitive disadvantage that Appian has is that it is effectively a standalone BPM system Other major players such as Oracle, SAP, and IBM have the option to ‘bundle’ their BPM offering with a larger database, ERP or related suite, thus competing very effectively on price as well as providing an integrated system that is more uniform across functions.”
In other words, Appian has that proverbial tough row to hoe if it’s ever going to achieve profitability. So you’d think that the company and its underwriters would want to get investors all psyched up about this new offering, right? They all likely do. But once again, there’s a familiar issue for us: voting rights.
Unlike the arrogant management of SNAP, Appian is at least doing what an increasing number of companies and IPOs have already done, namely, deploying two (or more) different classes of shares in their company structure to create a feudal system of corporate governance and voting.
The company’s “A” shares – the new shares being offered by the company – do indeed carry one vote per share, which is still normal and customary with common stock shares of most publicly traded companies.
However, the bulk of company’s shares, retained mainly by management and by the vulture capitalists who provide the ongoing funding for the company, are its “B” shares. None of these will be made available to the public. Just as importantly, they carry 10 votes per share as opposed to the “A” shares’ 1 vote per share. Worse, an enormous number of these “B” shares currently exist when compared to the relatively small tranche of new “A” shares being offered in this IPO.
In other words, the voting rights you obtain when you buy these shares are only marginally superior to the zero voting rights hapless purchasers of Snap Inc. received. Thus, any vote on corporate policy will by totally dominated by those “B” share holders. “A” share votes are, technically and actually, a waste of time.
To be perfectly evenhanded, APPN’s IPO strategy has grown increasingly standard in recent years, particularly when it comes to untried tech “unicorn” issues. Such new shares, miniscule in overall float, are offered in numbers that are just enough to establish a stable price for the stock in open market trading.
This tactic enables the company’s corporate sponsors to gradually execute the remainder of their longer-term strategy, which is to use future upward bumps in the price of the “A” shares, preliminary to unloading their own “B” shares, which they will convert to more “A” shares on their way out. That’s the way vulture capitalists make their money, which is also legal and OK, though we regard this voting-share methodology as underhanded.
More problematic, each time the “B” shareholders execute another share dump, they dilute any earnings that may exist for the “A” share holders by increasing the number of available “A” shares. Unless you’ve picked up a really, really hot new company (which Appian does not appear to be), you’re going to be stuck indefinitely with a company whose stock may go nowhere for a long time, while the original investors extract their profits at our risk.
Our plan: Much the same as our previous plan to acquire SNAP shares for a limited duration. If these shares are appropriately priced for a good “pop,” we’ll pick up some shares, assuming our brokerage firm gets enough to enable us little guys to get some. If the shares aren’t priced, or if we simply can’t get any, we’ll take a pass.
Shares will price Wednesday night. We’ll let you know what happens in a Thursday or Friday column. 50-50 on this one. But little else looks very attractive right now in a market that seems to be close to fully priced.