IPO Market Up

During the first quarter of 2017, 25 companies went public, raising $9.9 billion, the highest amount raised in the quarter over the past three years. Snap was the largest IPO in the quarter, raising $3.4 billion. There are currently 62 companies in the pipeline. These companies are expecting to raise $17 billion, a relatively thin pipeline.

Snapchat's Disappearing Votes

When Alphabet (parent company of Facebook) Google and Facebook went public, the founders of each, Sergey Brin and Larry Page and Mark Zuckerberg, wanted to maintain control of their respective companies. To accomplish, they created Class A shares, which have one vote and were sold to the public, and Class B shares, which have 10 votes per share. This effectively allowed the founders to control all decisions made by the company. One drawback is that as the companies grew and needed to issue more shares for employee stock options and acquisitions, the number of A shares grew, diluting control of the companies. Now, Snap, the parent of disappearing message app Snapchat, is planning an IPO and it appears that the company is going even further: It has been reported that the IPO will offer shares with no voting rights. All voting shares will be retained by the co-founders Evan Speigel and Bobby Murphy, who will retain 70 percent of the votes in the company.

The (Partial) Effects Of Tax Reform

With the U.S. corporate tax rate being among the highest among developed economies, there is discussion of corporate tax reform that would reduce the corporate tax rate from 35 percent to 20 percent, as well as the possibility of eliminating the deduction of interest expense entirely. So how would this affect corporate finance? A cut in the corporate tax rate on interest would reduce the attractiveness of debt as a form of financing, thereby reducing the amount of debt in the optimal corporate capital structure. One estimate is that the U.S. average debt-to-EBITDA ratio would drop from 4.1 to about 3 times, which would also affect the other financial leverage ratios. And the non-deductibility of interest expense would affect the calculation of the weighted average cost of capital. And, finally, at least for now, the decline in corporate debt will likely increase the credit rating for the remaining debt, driving the yield down on debt that does remain. All in all, major changes to U.S. based corporations.

Bond Issuance Booming

With the Federal Reserve recently increasing interest rates, you would expect that the amount of corporate bonds issuance would slow. However, at least in the first week of January, this was not the with the largest volume of bonds issued in history. Although the recent interest rate increases would seem to be a negative, it is believed that the Fed will further increase interest rates in 2017, making future bond issues even more expensive. And, while the average yield to maturity may have increased, the current 3.7 percent is still below the average over the past 10 years. Additionally, with the expected number of mergers and acquisitions expected for 2017, companies may be stockpiling cash in advance of these announcements.

Sears' Financial Distress Costs

When a company is in financial distress and bankruptcy is possible, it may be forced into actions that it would not like to undertake. For example, Sears, which has been has been faced with declining sales and mounting losses, recently announced that it was selling its iconic Craftsman tool brand. The sale of Craftsman to Stanley Black & Decker is for $900 million. Under the terms of the agreement, Sears will be able to sell Craftsman tools for 15 years royalty free. Sears also announced that it will close an additional 150 stores.

IPO Market Sluggish In 2016

With less than two weeks left in the year, it appears that 2016 will be a slow year for IPOs. Only 105 companies went public in the U.S., raising $18.8 billion, while 2015 had 170 IPOs that raised about $30 billion. The amount raised in 2016 was the lowest dollar amount raised since 2003. One potential reason for the slow IPO market is that many privately held companies have reached lofty valuations, with a growing number of unicorns and decacorns. A recent report argues that many of these private companies have lofty valuations that are not supported by public markets. If this is the case, the only way for investors in these companies to cash out with an IPO is by venture capitalists taking a potential loss on the IPO or waiting until the public stock market feels the valuation is in line with the company value.

Share Repurchases Decline

Even though companies in the S&P 500 repurchased $115.6 billion in stock during the third quarter, this actually represented a decline of 28 percent from the third quarter of 2015 and was the smallest quarterly repurchase since the first quarter of 2013. Apple led the way, repurchasing $7.2 billion of its stock, while General Electric repurchased $4.3 billion of its stock. The top sector for buybacks was IT, with $27 billion in repurchases, while the financials sector spent $25 billion on buybacks.