Introduction
The Deliveroo IPO ‘slump’ is being called the worst in London’s history. In this guide, we’re going to explain why. To do this, we’ll first briefly explain what an IPO is. We’ll also explain the key facts of the Deliveroo situation. Then, we’ll explain how the ‘slump’ happened in terms of three key factors: company growth projections, investor attitudes, and timing. Finally, we’ll explain the potential effect of the ‘slump’, before summing it all up for you at the end.
What is an IPO?
An Initial Public Offering (‘IPO’) is essentially the first time a company offers shares to the public. It’s a big deal because it means the company becomes publicly listed on a stock exchange. Deliveroo chose to list on the London Stock Exchange. This subjects them to much more scrutiny from regulators, investors, and consumers alike. The process is actually pretty complex (legally and financially) and can be quite costly as a result. We’re going to explain the essentials most relevant to understanding the Deliveroo ‘slump’. These are the valuation of IPOs, as well as the offering and opening price.
Valuation of IPOs
You typically offer shares in an IPO through investment banks. These banks conduct extensive calculations to value the shares. These calculations can be based on a number of factors. Some of the most relevant ones in relation to Deliveroo’s IPO are the growth of the company (including the company narrative) and investor attitudes (i.e. market demand for the shares). Once valued, they usually come up with a price range for picking the offering price.
Offering v opening price
Th offering price is the one you offer to really big investors. Once they purchase these shares, they are then open to be publicly traded. On the public market, demand determines the price of the shares. We refer to this market price as the ‘opening price’. Often, the valuation of the IPO is off. This is reflected in a discrepancy between the offering and opening prices. Some of the key reasons this can happen is if the valuation is based on unpopular or incorrect assumptions about the company/market demand. It can also happen because of timing issues/opportunities.
Deliveroo’s IPO
Deliveroo ran their IPO through investment banks like Goldman Sachs, JP Morgan, and the Bank of America. These banks set the offering price of Deliveroo’s IPO at £3.90. At this price, Deliveroo raised £1 billion in new shares. However, the opening price saw a significant drop of about 30%, hitting as low as £2.86. Even though Deliveroo had raised £1 billion in new shares, you have to remember that the market price determines how much any Deliveroo share is worth. Therefore, the company’s value as a whole can be affected by the market price. In fact, as a result of the drop, about £2.3 billion was wiped off Deliveroo’s estimated £7.6 billion valuation. This is why the whole situation is being referred to as the Deliveroo IPO ‘slump’. We are going to look at how the factors underlying incorrect valuations we identified above influenced Deliveroo’s IPO.
Company growth projections
Firstly, investment banks valuing Deliveroo’s IPO may have placed too much faith in the company’s growth. In the finance world, we typically consider growth stocks/shares good investments. These are basically shares with positive price projections linked to good indicators of the company’s growth. During the pandemic, Deliveroo was certainly growing with increased demand for food delivery services. However, despite this increased demand, Deliveroo had not made any profits since its inception. This has been making many people wary about the viability of food delivery services after the pandemic settles. Therefore, Deliveroo’s offering price may have been based on unpopular assumptions about their growth projections.
Investor attitudes
Secondly, many people have been complaining about the poor treatment of gig economy workers. In particular, there are concerns about Deliveroo’s delivery riders’ working conditions. Many big investors actually publicly stated their decision not to invest in Deliveroo’s IPO because of these issues. These views may have influenced wider-held sentiment regarding the company’s management and governance. Therefore, Deliveroo’s offering price may have underestimated the effects of Deliveroo’s recent scandals regarding their workers.
Timing
Thirdly, Deliveroo may have chosen an inopportune time for its IPO. Recently, finance experts have been noticing waning demand for tech shares for a whole range of reasons. Additionally, experts say that the IPO unfortunately coincided with low share-trading activity associated with the end of a financial quarter. Both of these factors may have dampened the demand for Deliveroo’s shares.
Effect of the ‘slump’
So what is the real effect of the Deliveroo IPO ‘slump’? Well, tech shares have been huge winners over the past decade despite recent wavering demand. Additionally, there has been some increases to Deliveroo’s shares since it opened to retail ‘everyday’ investors in the market. This suggests that not everyone has, or will have, the same views or values regarding Deliveroo and food-delivery services generally. Additionally, the dramatic underperformance of Deliveroo’s IPO is not a first in the tech space. For example, Google’s IPO underperformed compared to their rival Yahoo! at the time. Additionally, Facebook also received the ‘most disastrous IPO in history’ title for their IPO. Yet, these two companies are perhaps our biggest tech giants today. Therefore, you shouldn’t completely rule Deliveroo out based only on this ‘slump’.
Conclusion
In conclusion, an IPO is a complex way for a company to raise money and issue shares to the public. Deliveroo’s IPO ‘failed’ dramatically, with a stark contrast between its offering and opening share price. Key factors which caused the Deliveroo IPO ‘slump’ include faulty assumptions about the company and the market demand, as well as timing issues. Nevertheless, if the examples of Google and Facebook are anything to go by, this ‘slump’ may not spell the end for Deliveroo’s success story.
