In March this year, Snap went public. It did so by issuing shares without voting rights. Since the previous blogpost about this IPO, there have been some developments that are worth pointing out.
Snap has had some troubled months, with two disappointing earnings results. In July, the share price fell below the IPO price of 17$. Since then, the stock has continued to fall, with a rebound in the past week.
Additionally, two main index providers have decided to partially or fully exclude companies companies with multiple-class structures from their indexes.
- S&P Dow Jones has decided to exclude companies companies with multiple-class structures from its indexes, which includes the S&P 500. This decision only applies to prospective index constituents. As such, existing index constituents are not affected by this change.
- FTSE Russell consulted its index users and other stakeholders and made a proposal based on the results of this consultation. The result is that “[d]eveloped market constituents of all FTSE Russell indexes will in [the] future be required to have greater than 5% of the company’s voting rights in the hands of unrestricted (free-float) shareholders as defined by FTSE Russell.” For existing constituents, the rule will apply starting September 2022, affording them a five year period to change their capital structure.
Market indexes – like the S&P 500 or the Dow Jones Industrial Average – are used by passive investors (also called index funds). The portfolios of these index funds mirror a certain market index. They do not make active choices regarding their investments: they only mimic a market index. This means that it if a company is included in a certain index, all the index funds following that particular index will be “forced” (by their own rules) to buy shares of that company. Because of the growing importance of passive investing in the last several years, the listing standards of market indexes have become increasingly relevant. If a company is not a part of a certain index, it may miss out on a lot of investors.
As became clear when Snap went public, many investors care deeply about corporate governance issues. And this has translated into the decisions of these two major index providers. It is clear that many investors deem it unacceptable that they would have no voting rights in a company. They are willing to assert their power by forcing companies to give voting rights to investors.
As we already discussed in the previous blogpost about this topic, an advantage of a multiple class share structure is that it allows for a long term vision. Additionally, the founders are ensured that they will not lose control of their company. The measures that have now been taken might discourage founders from taking their companies public. This way, the public could be deprived of investment opportunities in promising companies.
 This can be useful because of several reasons. First of all, it’s cheap: no active decisions are being made. The fund just follows its own rules: it mimics a market index. As such, there is no need to employ a multitude of managers to make investment decisions (and of course, all of these fund managers cost a lot of money). Additionally, “Many investors […] find it difficult to beat the performance of the S&P 500 Index due to their lack of experience/skill in investing.” An interesting series of articles on passive investing can be found here.
One thought on “Snap’s IPO, an update”
Interesting read, thank you! Some quick comments: passive investing is an application of the classic principle in corporate finance theory of “diversification”. These indexes make it easier for investors to invest in the maximally diversified “market portfolio”. By excluding certain companies from these indexes, optimal diversification is prevented. According to the traditional reasoning in corporate finance, this decreases value. The underlying assumption of the index providers thus seems to be that the market does not efficiently price these dual class structures. Whether this is the case is of course up for debate. But to me it seems that the index provider’s decision is mainly a political one, and not one based on economic reasoning.