We can look at the pricing of an IPO as just the single transaction. Those selling – which includes earlier investors and possibly the company itself – would like to gain the maximum price for what they’re selling. Those who continue to hold from that group would like to maximise the price over time of course, not just at that one instant of the IPO.
However, this all gets rather more complicated when we realise that the system itself isn’t so much interested in the one transaction but rather in the success of the system. We thus enter rather more complicated economics:
This is where we get to the double sided market thing, the study of which gained Jean Tirole his Nobel. The archetype is the newspaper. It’s selling journalism to the readers and at the same time selling the readers’ attention to the advertisers. Google sells us search, it sells our eyeballs to advertisers. Facebook and so on – all double sided markets. So too the IPO process. The market as a whole is selling investment opportunities to investors and yet also investor’s money to those selling investment opportunities. There are two sets of customers here and it’s unlikely that both sides are going to be entirely happy about any one deal.
Add onto that the principal/agent problem. The sellers of the stock into the IPO are very interested indeed at the price their specific deal gets. Their agents, the IPO market participants, are much more interested in the idea that the transaction goes ahead and that the pipeline of transactions continues than they are in the specific price of one particular deal. A nice empirical proof of this was the chapter about realtors in Freakonomics. When they’re selling their own properties they achieve rather higher prices than when they sell seemingly equivalent properties for customers. They also take rather longer to sell in order to gain that price. This is the difference between their operating as principals instead of agents.
Predicting how the IPO price of Uber will be influenced by the immediately previous series of IPOs is thus difficult.