Small square

19 Nov 2015 By Robert Cyran

Public stock-market investors have lassoed Square to tame the unicorn, that Silicon Valley species of private companies worth more than $1 billion. Jack Dorsey’s payments firm has priced at $9 a share, below the $11-to-$13-a-share range indicated two weeks ago. The company’s two-timing chief executive, rising competition and substantial losses provided ammunition for old-school mutual fund managers demanding big discounts to lofty private valuations.

The IPO price values Square at $2.9 billion. That means the company is now worth 56 percent less than the $6 billion price tag attained in its private financing round a year ago, after factoring in the $230 million of new money being raised in the IPO. The company’s challenges explain the drop. For instance, Starbucks recently announced it will no longer use Square to process credit card payments, eliminating about 11 percent of revenue and raising fears growing will be hard – though Dorsey’s firm spent more than it earned servicing the deal.

Moreover, the company’s losses increased to $131 million in the first three quarters of 2015. It faces stiffening competition from the mighty Apple, Samsung, numerous startups and more recently from traditional banks and other payments players like Verifone which are upping their game. In some cases it has left Square in the uncomfortable position of playing catch-up. In addition, Dorsey also runs Twitter, which would be job enough for most mortals.

Many hedge funds sat out this offering, bankers say – an increasing trend in IPOs in recent months. So the price was set by institutional investors like mutual funds. And many of them have become wary of the short-term squeeze that has accompanied similar offerings. Square only offered around 10 percent of itself. Selling a sliver of equity tends to jack up the price. Companies like Fitbit, GoPro and Shake Shack have used this dynamic to eventually price large secondary stock offerings at overly ripe prices.

Public investors may now have a stronger whip hand in pricing floats. While other unicorns such as Hortonworks and Box have received tepid receptions from the market, Square is both larger and better known. Of course, the fact many late-stage investors have liquidation preferences, ratchets and other provisions also makes it hard to compare headline figures. But the scale of Square’s relative decline indicates that other big Silicon Valley firms whose worth is based on hope, rather than solid and growing profits, may face a chilly reception.




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