Should You Be Buying What Robinhood Is Selling? | Sidnaz Blog


In rare cases, such pitches have paid off big time. More often, you’d have done yourself a favor by taking roughly half your money and lighting it on fire instead.

Just as Robinhood isn’t the first brokerage to offer commission-free trading, it isn’t the first to seek to “democratize” investing or to sell a piece of itself to its own customers.

On June 23, 1971, Merrill Lynch, Pierce, Fenner & Smith Inc. became the first New York Stock Exchange firm catering to individual investors to offer its shares to the public.

Thirsty for fresh capital in a struggling stock market, Merrill flogged its shares to its own customers, tapping the firm’s “awesome recognition among that vast segment of the population,” reported The Wall Street Journal the next day. “Primarily small investors, the type long championed by Merrill Lynch, quickly purchased the entire amount.”

Nearly 400 insiders at the firm unloaded a total of 2 million shares in the offering. From its initial $28 per share, the stock shot to about $42—a 50% pop—then closed around $39. That valued Merrill at 30.5 times its prior-year earnings, much higher than the overall stock market’s price/earnings ratio of 18.7.

Less than three weeks later, Merrill announced that its net earnings had fallen nearly 50% from the prior quarter.

For the rest of 1971, Merrill’s stock lost 9.4%; the S&P 500 gained 4%, counting dividends.

In 1972, when the S&P 500 rose nearly 19%, Merrill sank 7.7%. And in 1973-74, when the S&P 500 lost 37%, Merrill’s stock slumped by 61%. In its first three full years, Merrill’s stock lost three-quarters of its value; the S&P 500 fell only 5%.

Here in 2021, Robinhood’s offering is one of several trading and investing IPOs:

Coinbase Global Inc.,

the cryptocurrency exchange, went public in April, and

Acorns Grow Inc.,

which helps users invest in tiny increments, said in May that it expects to go public later in the year. Since its Apr. 14 debut, Coinbase is down about 27%. Robinhood fell 8% on its first day of trading Thursday.

One of Wall Street’s oldest and frankest sayings is “When the ducks quack, feed ‘em”—meaning that whenever investors are eager to buy something, brokers will sell it like mad.

Back in 1971, that was the brokers’ own shares. Roughly half a dozen major firms sold stock to the public soon after Merrill, including Bache & Co. and Dean Witter & Co. By 1974, according to data from the Center for Research in Security Prices LLC, several of them had dealt losses at least as devastating as Merrill’s.

In 1987, Jane and Joe Investor got invited to join in on the fun of Charles Schwab Corp.’s IPO, when roughly three million of the offering’s eight million shares were reserved for employees and customers of the firm.

Unlike Merrill, which was rescued from the brink of failure in 2008 when

Bank of America Corp.

bought the firm, Schwab went on to generate spectacular long-term performance. Over the full sweep of time since its 1987 IPO, Schwab is up more than 26,500%, or 17.9% annualized. The S&P 500 gained less than 3,500%, or an average of 11.3% annually.

However, Schwab went public in late September 1987. Only 18 trading days later, on Oct. 19, the U.S. stock market took its biggest one-day fall in history, plunging more than 20%.

Schwab’s stock got brutalized. In their first year, Schwab’s shares fell 59.1%. After three years, the market as a whole had gained 0.6% annually; Schwab’s stock lost an annualized average of 6.9%, according to CRSP.

How many of the original buyers in 1987 stuck around long enough to reap the giant rewards that came much later? That’s impossible to know, but the likeliest answer has to be: very few.

Every once in a while, outside investors in a brokerage IPO do well.

Goldman Sachs Group Inc.

began trading on May 4, 1999. If you’d bought Goldman stock in the IPO and held it ever since, you’d have earned 9.1% a year, versus 7.6% in the S&P 500, according to FactSet.

Yet Goldman was a giant then, as it is now; it was late to the IPO party because it had held on to its partnership structure for so many years. Most brokerage IPOs, like Robinhood’s, occur when the firms are younger and smaller.

That makes them typical. Companies selling shares to the public for the first time tend to be small, with minimal profits; they also require additional invested capital to sustain their rapid growth.

That’s what Savina Rizova, global head of research at Dimensional Fund Advisors, an asset manager in Austin, Texas, calls “a toxic combination of characteristics that points to low expected returns.”

On average, IPOs have severely underperformed seasoned stocks in the long run. And, history suggests, brokerages doing IPOs are better at timing the market for themselves than for you.

Write to Jason Zweig at [email protected]

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The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges. Photo illustration: Jacob Reynolds/WSJ

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William Ackman Needs a Soothing Pitch After Universal Music Drama | Sidnaz Blog


Pershing Square Tontine Holdings had planned a $4 billion purchase of a 10% stake in Universal Music Group.



Photo:

Bing Guan/Bloomberg News

William Ackman’s

blank-check company picked a good target but a poor deal structure. To keep investors happy, both need to be right on a second attempt.

On Monday,

Pershing Square Tontine Holdings


PSTH -1.45%

$4 billion purchase of a 10% stake in Universal Music Group was called off. The world’s biggest record label will be spun off from its French owner

Vivendi

and listed on the Amsterdam stock exchange in September. The SPAC’s investors were offered early exposure to an attractive business at a low valuation.

The deal’s complexity has been part of its undoing. After spending 72% of the SPAC’s cash on the Universal stake, $1.6 billion would be left over for another acquisition. Investors also would get warrants to buy into an additional blank-check deal. The Securities and Exchange Commission, which is scrutinizing SPAC deals more closely these days, said that as more than 40% of its assets would be in a minority stake, Pershing Square Tontine risked becoming an unregistered investment company.

The SPAC’s workaround caused a headache for investors. The Universal shares were to be locked up in a trust for four months, which would trigger a fall in Pershing Square Tontine’s share price—bad news for a sizable chunk of the SPAC’s shareholders who bought the stock on margin. The final nail in the coffin was the SEC’s opinion that the Universal stock purchase wouldn’t meet the New York Stock Exchange’s SPAC rules.

Mr. Ackman still gets his hands on the record label because the

Pershing Square Holdings


PSH -4.85%

hedge fund will buy the stake instead. This way, though, he will tie up a lot more capital in Universal than initially planned. Under the original deal, his fund would have owned a 3% stake but that number could now be closer to 10%.

More pressing is the need to pacify institutional investors and family offices that liked the idea of a stake in Universal and missed out. The deal also was supposed to showcase what the hedge-fund billionaire could accomplish with future blank-check vehicles. It hasn’t been a good start.

Pershing Square Tontine Holdings’ shares are down almost one-fifth since the Universal deal was announced and now trade just in line with their net asset value. Its founder has learned the lesson to keep things simple; the SPAC will do a conventional deal next, according to an investor letter Monday. Investors will be harder to impress the second time around.

Private companies are flooding to special-purpose acquisition companies, or SPACs, to bypass the traditional IPO process and gain a public listing. WSJ explains why some critics say investing in these so-called blank-check companies isn’t worth the risk. Illustration: Zoë Soriano/WSJ

Write to Carol Ryan at [email protected]

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Robinhood IPO Expected to Value Trading App at About $33 Billion | Sidnaz Blog


Menlo Park, Calif.-based Robinhood Markets operates a stock-trading platform for individual investors.



Photo:

olivier douliery/Agence France-Presse/Getty Images

Trading app Robinhood Markets Inc. said it expects to raise about $2 billion in its initial public offering, which would give it a market value of about $33 billion, according to a securities filing Monday.

Robinhood would sell about 52.4 million shares in the offering, and other stockholders would sell about 2.6 million. At the $40-a-share midpoint of the offering range, Robinhood would raise about $2 billion.

The Menlo Park, Calif.-based company operates a stock-trading platform for individual investors.

In the first quarter of 2021, Robinhood recorded revenue of $522.2 million, the company said in a regulatory filing. It posted a loss of $6.26 a share. In the first quarter of 2020, the company’s net loss was 23 cents a share on revenue of $127.6 million.

The brokerage app Robinhood has transformed retail trading. WSJ explains its rise amid a series of legal investigations and regulatory challenges as it looks forward to its IPO. Photo illustration: Jacob Reynolds/WSJ

Write to Matt Grossman at [email protected]

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Zoom Video, Five9, Exxon, IBM: What to Watch When the Stock | Sidnaz Blog


Global stocks are broadly lower, along with government-bond yields and commodity prices, amid renewed anxiety around the Delta variant of Covid-19 and inflation. Here’s what we’re watching ahead of Monday’s open. Full market wrap here.

A sign for Zoom Video Communications ahead of the company’s Nasdaq IPO in New York, April 18, 2019.



Photo:

Mark Lennihan/Associated Press

Chart of the Day

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Ackman SPAC Decides Against Buying 10% Stake in Universal Music | Sidnaz Blog


Universal Music’s headquarters in Santa Monica, Calif., earlier this year.



Photo:

Bing Guan/Bloomberg News

Pershing Square Tontine Holdings Ltd.


PSTH -1.81%

, a blank-check company led by hedge-fund manager

William Ackman,

said it won’t proceed with its proposed acquisition of a 10% stake in Universal Music Group and will assign its share-purchase deal to

Pershing Square Holdings Ltd.

Vivendi

SE—Universal’s majority owner—said it approved Pershing Square Tontine’s request to assign its rights and obligations under a June 20 agreement to investment funds with significant economic interests or management positions held by Mr. Ackman.

The French media company said the equity interest eventually acquired in Universal Music will now be between 5% and 10%. If it falls below 10%, Vivendi said it would still sell the additional interest to other investors before the planned spinoff of Universal Music into an Amsterdam-listed company in September.

On June 20, Pershing Square Tontine agreed to buy 10% of the ordinary shares of Universal Music in a deal valuing the world’s largest music company—home to stars including Taylor Swift, Billie Eilish, Queen and the Beatles—at about $40 billion.

Pershing Square Tontine said its decision to withdraw from the deal was prompted by issues raised by the U.S. Securities and Exchange Commission. The company said its board didn’t believe the deal could have been completed given the SEC’s position.

The blank-check company said its board concluded that assigning its Universal Music stock-purchase deal to Pershing Square was in the best interest of shareholders. Pershing Square Tontine said Pershing Square intends to be a long-term Universal Music shareholder.

Pershing Square Tontine said it would seek a new transaction, which will be structured as a conventional special purpose acquisition company merger. The company said it has 18 months remaining to close a deal.

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Ingersoll Rand Has Made Takeover Bids for SPX Flow | Sidnaz Blog


SPX Flow primarily makes components for machinery used by food-and-beverage and industrial companies.



Photo:

Benoit Tessier/Reuters

Ingersoll Rand Inc.


IR 0.06%

has made takeover bids for component maker

SPX Flow Inc.


FLOW -1.59%

that have so far been rebuffed, according to people familiar with the matter.

The industrial-machinery company’s most recent all-cash offer valued SPX Flow in the low-$80s a share, the people said, or around $3.5 billion. SPX shares closed Friday at $62.09, giving the company a market value of about $2.6 billion.

Charlotte, N.C.-based SPX primarily makes components for machinery used by food-and-beverage and industrial companies. Ingersoll Rand, one of the world’s largest manufacturers of industrial pumps and compressors, has a market value of about $20 billion.

In 2019, the former

Ingersoll-Rand


TT 0.04%

PLC, then incorporated in Dublin, agreed to merge with Gardner Denver Holdings Inc. The deal combined Gardner Denver’s selection of compressor, pump, vacuum and blower products and services with the part of Ingersoll Rand that made similar tools and systems as well as equipment for lifting and material handling, and golf carts.

The remainder of the company—heating, ventilation and air- and temperature-controlled transport businesses—became

Trane Technologies

PLC.

Former Gardner Denver Chief Executive

Vicente Reynal

has led the combined company since the deal closed in 2020. Ingersoll Rand has since sold its golf-cart business to private-equity firm Platinum Equity for around $1.7 billion.

Private-equity firm KKR & Co. owned a stake in Gardner Denver at the time of the merger and remains a more-than-7% shareholder in Ingersoll Rand, according to FactSet. It also holds seats on the board.

Write to Cara Lombardo at [email protected] and Miriam Gottfried at [email protected]

Copyright ©2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8

Appeared in the July 19, 2021, print edition as ‘Ingersoll Is Bidding To Acquire SPX Flow.’



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Intel Is in Talks to Buy GlobalFoundries for About $30 Billion | Sidnaz Blog


Intel plans to make more chips for other tech companies.



Photo:

David Paul Morris/Bloomberg News

Intel Corp.


INTC -1.26%

is exploring a deal to buy GlobalFoundries Inc., according to people familiar with the matter, in a move that would turbocharge the semiconductor giant’s plans to make more chips for other tech companies and rate as its largest acquisition ever.

A deal could value GlobalFoundries at around $30 billion, the people said. It isn’t guaranteed one will come together, and GlobalFoundries could proceed with a planned initial public offering. GlobalFoundries is owned by Mubadala Investment Co., an investment arm of the Abu Dhabi government, but headquartered in the U.S.

Any talks don’t appear to include GlobalFoundries itself as a spokeswoman for the company said it isn’t in discussions with Intel.

Write to Cara Lombardo at [email protected] and Dana Cimilluca at [email protected]

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NortonLifeLock in Talks to Buy Avast | Sidnaz Blog


Prague-based Avast primarily makes free and premium security software, offering desktop and mobile-device protection.



Photo:

david w cerny/Reuters

NortonLifeLock Inc.


NLOK -0.92%

is in talks to buy European cybersecurity firm

Avast

Plc, according to people familiar with the matter, in a deal that would expand the U.S. company’s focus on consumer software.

A deal could be finalized this month, assuming talks don’t fall apart, the people said. Avast has a market value of around £5.2 billion ($7.2 billion). Assuming a typical deal premium, the deal could value the cybersecurity firm at more than $8 billion.

Avast is based in Prague but trades in London. It primarily makes free and premium security software, offering desktop and mobile-device protection. Avast traces its roots back roughly 30 years to when founders

Pavel Baudiš

and

Eduard Kučera

established the company, then known as Alwil. It says on its website that it rebuffed an acquisition offer from rival McAfee in 1997, instead licensing its antivirus product to the company. It became Avast in 2010 and went public in London in 2018. In 2014, private-equity firm CVC Capital Partners took a significant minority stake.

Avast’s founders control roughly 35% of the shares and sit on its board.

The deal would be a big one for NortonLifeLock, which is based in Tempe, Ariz. With a market value of about $16 billion, the company was known as Symantec Corp. before it closed a $10.7 billion deal to sell its enterprise-security business to

Broadcom Inc.

in 2019. What is left mainly sells Norton antivirus software and LifeLock identity-theft-protection products to consumers.

The company had attracted takeover interest of its own a few years ago, but nothing has come of it.

Activist investor Starboard Value LP owns a roughly 3% stake in NortonLifeLock, according to FactSet, and holds a board seat. It first took the position in 2018.

Write to Cara Lombardo at [email protected] and Dana Cimilluca at [email protected]

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Broadcom Isn’t in a Buyer’s Market | Sidnaz Blog


Broadcom typically aims to purchase undervalued companies, but undervalued software names are hard to come by lately.



Photo:

Justin Sullivan/Getty Images

Broadcom’s


AVGO -0.14%

pivot to software was never going to be easy, and it has grown only more difficult since that effort began.

Such is most evident in the company’s latest tack: The Wall Street Journal reported Monday that Broadcom was in talks to buy privately held SAS Institute for as much as $20 billion. By late Tuesday, the deal was off—apparently due to a change of heart by SAS’s owners. Sources told the Journal that some employees expressed concern about how the perk-heavy culture at SAS would meld with a chip maker whose modus operandi is to squeeze out inefficiencies to maximize earnings. SAS’s owners reportedly distribute hundreds of pounds of free M&Ms across the company’s North Carolina campus every Wednesday.

Hyper-acquisitive Broadcom turned its sights to software in July 2018, when it announced a surprising deal to acquire CA Technologies for $18.9 billion. It has since picked up the enterprise security business of

Symantec

for $10.7 billion.

The CA deal came just four months after Broadcom lost its most ambitious chip gambit yet—a $117 billion hostile takeover bid for

Qualcomm

that was blocked by the Trump administration on national security grounds. That attempted deal became a tipping point in the semiconductor cold war between the U.S. and China, which in turn has made nearly impossible the type of large-scale chip deals Broadcom had come to rely on.

Rolling up software companies may not bring the same kind of political baggage. But it does have its challenges. Broadcom’s deal strategy has long centered on finding undervalued businesses that have strong market share within their categories, then maximizing the free cash flow of those acquired businesses.

But undervalued software names are hard to come by these days. The S&P 500 Software & Services Group’s average multiple has surged 45% over the past three years to nearly 33 times forward earnings, which itself represents a 37% premium to the average forward earnings multiple of the PHLX Semiconductor Index.

Going after a private company may have helped Broadcom on that score; analysts estimate the sales multiple Broadcom was offering for SAS was roughly on par with what it paid for CA and Symantec. But the prospect of talent flight is always a risk in picking up software companies, which have few other assets.

The loss of the deal now sends Broadcom back to the drawing board. It has been nearly two years since the Symantec deal, and Wall Street is getting anxious for the company to make its next move—or return excess cash in the form of a buyback. Broadcom investors need their candy as well.

Write to Dan Gallagher at [email protected]

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Broadcom No Longer in Talks to Buy SAS Institute, Sources Say | Sidnaz Blog


Broadcom, a semiconductor powerhouse built largely through acquisitions, has been on the hunt for a deal to beef up its presence in the corporate-software market.



Photo:

Justin Sullivan/Getty Images

Talks for

Broadcom Inc.


AVGO -0.36%

to buy SAS Institute Inc. have ended after the founders of the closely held software company changed their mind about a sale, people familiar with the matter said.

The Wall Street Journal reported Monday that the companies were discussing a deal that would value SAS in the range of $15 billion to $20 billion, including any debt. Following the report,

Jim Goodnight

and

John Sall,

who co-founded SAS decades ago and still run the company, had a change of heart and decided not to sell to Broadcom, the people said. Whether another suitor for SAS could emerge isn’t clear.

Some SAS employees saw the company as a strange fit for efficiency-focused Broadcom, some of the people familiar with the matter said. SAS is known for a tightknit culture and has a sprawling North Carolina campus with amenities including a yoga studio and a disc golf course.

Cary, N.C.-based SAS sells analytics-, business-intelligence and data-management software to enterprises. The company traces its roots back to the 1960s, when universities teamed up to analyze troves of agricultural data through a program called the Statistical Analysis System.

Broadcom, a semiconductor powerhouse built largely through acquisitions, has been on the hunt for a deal to beef up its presence in the corporate-software market. Its chief executive,

Hock Tan,

said earlier this year the company would look at buybacks and possibly debt repayment, if it didn’t make an acquisition by the end of the fiscal year. That typically ends in late October or early November.

Write to Cara Lombardo at [email protected]

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