Snap Inc.’s IPO Case Study
Introduction
Snapchat is one of the valuable camera companies that improves the way people communicate and live. The chairman of the company needs to make a decision about addressing the concerns of the investors, related to the unprecedented plans of company to use only non-voting shares in the upcoming initial public offerings. The company has decided to go public through issuing IPOs in the market. The case deals with the forecast and assumptions made by analysts for to the price of IPO and the key challenges and opportunities of the Snap’s business.
Key challenges & opportunities of Snap’s business model and economic proposition
The business model of the company is based on two main advertising products Snap Ads with Advertisement and Sponsored creative Tools that allows the company to have revenues. Additionally, another source of Snapchat’s revenue is sale of Spectacles – a hardware product that has provided an enhanced experience to users through the wearable device, all the while maintaining the ephemeral nature of communicating through Snapchat. Furthermore, the reach and frequency buying type is another source through which, Snapchat makes majority of its revenues.
One of the key challenge of the Snapchat’s business model is that it is replicable by the competitive players as Facebook is the direct challenge to Snapchat and Instagram is gradually developing numerous functions similar to that of Snapchat’s. An intense market competition could make a shift to consumer electronics.
In addition to this, Snapchat can exploit the opportunities of engaging with influencers, connect with audience and highlighting new products. Additionally, Snapchat can also create new forms of communication for users, through products and other functions.
Factors driving Snapchat’s decision to go public
Prior to IPO, the conditions of the market were favorable as S&P 500 Index hit high records and the average returns of the IPO were up to 23 percent from the price offerings. The observers of the industry were expecting that the market of IPO would recover because of the more clarity on policies of the US presidents and an improved economic outlook. The interest rates were increased with the expectations that they would continue to climb up in the year 2017.
In addition to this, as the employees are heavily attracted to stock options of the company that are traded on public markets. As such, the factor that has driven Snapchat’s decision to go public through issuing IPO is that it helps the company to attract better talent for the purpose of competing with its market rivals efficiently. Furthermore, the main source of the improved expectations of the company for going pubic came from many high tech decagons that were likely issuing IPO.
Comparison between statistics & performance of Snap to competitors at the time of IPO
Referring to the Exhibit 15 provided in the case; the biggest competitor Facebook and Google are marked with higher revenues of $3711 and $1466 million, which are considerably higher than that of Snapchat’s, i.e. $404 million. Additionally, the operation income of Snapchat was negative, whereas the operating income of competitors including Google, LinkedIn, and Facebook were positive. Furthermore, the user minutes per day of Snapchat were half than the user minutes per day of Google and Facebook. The statistics shows that the performance of Snapchat was not up to the mark.
The reasons a company choose to stay private longer
The companies were preferring to stay private for the longer due to many reasons, such as :ability to maintain their control over the business operations of the company, protection of the company from the activist investors as well as hostile. Another reason is the difference between the private and public valuation. The high tech companies operate in the highly profitable industry, as companies are associated with the value added production due to which these companies generate revenues based on profit potential rather than the actual results. Furthermore, the private investors held high tech companies until and unless they grow big enough for justifying the high valuation of the public market. Also, the private investors could accept low valuation when they have an urgency to exit. The valuation of the tech companies are high due to their scalability.
IPO has some drawbacks; the public company is obliged to file its financials with SEC each year, and these financial are required to be prepared in accordance with the US GAAP principles. The regulations of SEC are costly and burdensome. To publicly report the financial position of the company, it should establish more stringent financial control, staff an audit committee and financial reporting team, hire audit firms, and implement yearly or quarterly close processes and other tasks. Additionally, if the leaders of the company are doing best for long run profit and fail to meet the short term goals of the public, it might cause the company to lose its value. The founders of the company might lose control of the company if shareholders feel that the company is not running in a manner that could help them in making money, they would force the company to replace the leaders and founders.(Salomon, 2018).
Capital structure of proposed IPO
The capital structure of Snap is based on three classes of shares A, B & C. In the Class A common share, the investors do not confer any voting rights on their holding. Additionally, the Class B and Class C come with one votes per share and ten votes per share respectively. For the company, which says that it would raise 3 million dollars in its offerings, a key question is that whether an aggressive capital structure of the company would scare off the investors or not.
Class A shares
Despite of the fact that the holders of the Class A investors can recover their investment that they have made in the company in case of any uncertainty and failure, and can receive more dividends as compared to other Classes of shares. In addition to having no voting rights, the holders of the Class A shares of the Snap would not be able to raise concerns at the annual shareholder meeting of the company and nominating director at these meetings.
Class B shares
The holders of the Class B shares have one voting power, and are considered small investors. Regardless of having more voting power than Class A shares holders, the investors have lower dividend priority as compared to that of Class A’s shareholders.
Class C shares
The Class C’s shares seem to be the preferential options for the investors with short time horizons, who intend to keep mutual fund for few years’ time period. The investor prefers class C’s shares due to some advantages, which include: no upfront commission, no back end sales charge after 1 year as well as good intermediate term investment for 1 to 3 years. In contradiction to benefits, the Class C’s shares have some drawbacks as well, such as :high expense ratio, back end loan on withdraw in first year and not good for the buy and hold strategy…..
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