In the wake of Snowflake, Unity prepares a unique start

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“No, higher,” Elon Musk told investment bankers before Teslaof (NASDAQ: TSLA) IPO in 2010, hesitant to the recommended offer price of $ 15. Most business executives defer to the bankers they hired for valuation questions, but Musk needed as much capital as possible to fund the booming electric carmaker’s operations. The eccentric billionaire insisted on a bid price of $ 17, threatening to cancel the deal unless he gets his way – and wins.

The anecdote illustrates the opposing forces at play in traditional IPOs, where companies want higher prices in order to maximize the deal’s proceeds, but investment bankers prefer to create a pop on day one to reward them. investors (mainly institutional) who buy. delicate balance, which has only become more and more controversial over time, which is part of the reason why many companies are increasingly exploring alternative avenues to public procurement in recent years, such as direct listings or Special Purpose Acquisition Companies (SPAC).

The traditional IPO process has been criticized in recent years. Image source: Getty Images.

After Snowflakeof (NYSE: SNOW) huge splash in public markets today – with stocks more than doubling from the $ 120 offering price – Unity Software is preparing its own debut at an opportune time. Investors can’t get enough of state-of-the-art IPOs, which makes it a rather favorable environment to go public. But it won’t be like any other IPO; Unity CEO John Riccitiello borrows a page from Musk’s playbook.

Greater influence on the offer price

Unity updated its prospectus today with a new price range, expecting the deal to be between $ 44-48 per share, up from the previous estimated range of $ 34-42 . That would place the game engine maker’s valuation between $ 11.6 billion and $ 12.6 billion, based on the 263.4 million shares that will be outstanding after the offer.

Here’s the kicker: Riccitiello and his team have gained greater control over how transaction prices and Unity will also have more leverage over which investors will receive shares, according to CNBC and the Financial Times. Unity and its underwriters would try a new auction system in which institutional investors submit indications of interest (IOIs) that specify how many shares they wish to buy and at what price, and potential investors can submit numerous offers at different prices.

Unity is the most popular mobile game engine. Image source: Getty Images.

Based on these bids, Unity will then choose the bid price and all investors who submitted bids above that price will be awarded shares in the primary market, according to FT. In addition, Unity will have some influence on how these allocations are distributed to investors. The updated prospectus filed today does not mention this tendering process at all.

Alphabet The Google subsidiary used a similar modified Dutch auction process when it went public in 2004.

A little pop?

The traditional IPO process is shrouded in mystery for most retail investors. Normally, investors submit an IOI to temporarily buy a certain number of shares. Bankers then use these IOIs, along with other inputs, to help set a price based on the aforementioned balance. After the prices go public, potential investors should confirm that they are still interested based on the new price information. The shares are then allocated, generally oriented towards institutional heavyweights, and the allocations are not guaranteed.

While IPO investors love to see massive bursts of Snowflake on day one of trading – who doesn’t like to double their money in one day? – companies often view this as money left on the table, as these pops indicate that there was sufficient demand for the higher priced IPO. While the market outlook is nice, issuers prefer to bolster their war chests and use that money to actually function.

Unity’s unique bidding process is designed to provide greater transparency to a notoriously opaque process, theoretically justifying a higher IPO price that could also limit potential pop on the first day of trading. Unity’s IPO is scheduled for tomorrow.



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