IPO
Mind the Gap
by

Snap’s offering represents a disastrous corporate governance milestone

It will put regulatory reform pressure on Hong Kong and other major exchanges to eliminate all pretence of investor protection, just to win tech listings

PUBLISHED : Sunday, 05 February, 2017, 8:05pm
UPDATED : Monday, 06 February, 2017, 10:00am

For such a large tech offering, the Snap Inc IPO, on the New York Stock Exchange, is quickly looking pretty toxic.

Ignore that the owner of the popular messaging service Snapchat is only just making a 7 per cent gross margin whereas in previous IPOs like Facebook or even Twitter were making 50 per cent or more. Toss in the warning from the filing that Snap may never reach profitability, the usual amount infrastructure to be built, no voting rights and a high expense and the IPO begs credulity.

Snap’s $3 billion fundraising target (valuing it at up to $25 billion) could make it the third largest US technology offering in recent years, after Alibaba, which raised $22 billion, and Facebook, which raised $16 billion.

But, most of all, Snap’s offering represents a disastrous corporate governance milestone.

The IPO would be the first to offer shares with no voting power. And co-founders Evan Spiegel, chief executive officer and Bobby Murphy, chief technology officer will control the company for a period even if they resign or die. The prospectus states that a founder’s voting power would only be diluted if he cut his stake substantially or “nine months after death”.

Snap’s fund raising strategy represents a brazen new frontier in subverting corporate governance. Other technology companies, including Google and Facebook have diverted control into the hands of their founders by developing different classes of stock. But none has gone public with a class that has no votes at all. Bankers will argue that it is like a sale of loan stock or preference shares.

However, raising such a large amount of non-voting shares upon listing compromises investors. In the case of Google, the founders’ dual class shares only last for one generation and cannot be passed on. That principle should be enforced against the argument used by billionaire tech tycoons: that their success depends on cultivating and maintaining a unique corporate culture.

Few have been able to elaborate what that means except that it helps them concentrate on building long-term value rather than worrying about short-term share price pressures.

It is not in the interests of shareholders to entrench managers especially in a volatile industry that can be upturned by someone inventing the next “new, new thing” in his or her garage

Activists say dual class shares rob shareholders of a mechanism for holding management to account if performance falters. And things always go wrong especially when share prices fall. However, if they insist then regulators should believe them –for the first generation of managers.

It is not in the interests of shareholders to entrench managers especially in a volatile industry that can be upturned by someone inventing the next “new, new thing” in his or her garage.

Today, Snap doesn’t even bother with voting rights. It strips the right entirely from IPO investors.

It’s a downhill race for corporate governance as it will put regulatory reform pressure on Hong Kong and other major exchanges to eliminate all pretence of investor protection just to win tech listings.

Institutional investors have to buy into this IPO if the stock is included in the major indices. Perhaps index providers should consider whether non-voting share classes should indeed be included in major indices such as the S&P 500 as a way to encourage fair governance practises.

There are precedents for such adjustments such as the emergence of whole index classes based on principles of good governance.

The sellers of equity in this IPO should be able to create any class of share they want with any conditions. But, passive funds need to be able to exclude non-voting shares even if the company qualifies for the index.

Peter Guy is a financial writer and former international banker