McAfee (ticker:MCFE), the internet security firm founded in 1987 by John McAfee, has had a rough return to the market; this marks its anticipated second IPO, as previous to this it had traded from 1999 to 2011 where it was later acquired by Intel for $7.7 billion.
They issued a total of 37 million shares on 22nd October 2020 at a price of $20, raising a total of $740 million in total however it hasn’t been an easy ride - trading below this price ever since. As of 30th October, it closed at a price of $16.76, representing a decline of 16.2% from its original $20 IPO price. As shown in the chart below, it has had trading volume however it has dipped sharply since 27th October with no sign of recovery any time soon.
(Chart Courtesy of NASDAQ)
This spells bad news not only for investors but also McAfee’s underwriters who have the option to purchase an additional 5.5 million shares at the IPO price. An underwriter is someone who helps a company go public. This is because it wouldn’t be profitable to the underwriters who have the option to purchase additional shares at the initial $20 price, especially given they don’t seem to be showing much promise, declining for 3 days nearly. It’s unclear how much weight is placed on these additional available shares performing well but there’s no doubt it has reduced the overall profitability of the deal for each bank who was involved.
Astonishingly eighteen firms worked on the deal with such names including: Goldman Sachs, Morgan Stanley and Bank of America; it is of no doubt they all were paid a hefty sum which would have cost MacAfee a small fortune.
In addition to the problem of their stock underperforming, they carry considerable debt - a total of $4.8 billion. It is reported that they will use around $525 million from the IPO to lower this which isn’t a bad move considering the outlook of the global economy. Debt is becoming increasingly difficult to reduce as there is less economic activity, resulting in less turnover, and therefore reducing profit. This should boost investor sentiment as steps are being taken to improve the financial health of the company overall. However there is a long way to go yet - $4.8 billion will not disappear off their balance sheet overnight.
As seen throughout 2020, the tech sector has seen a range of successful IPO’s, with many outdoing each other’s performance as they all raise increasingly large amounts of capital. The largest being that of Snowflake, a cloud-based software company based in California. They managed to raise a whopping $3 billion, which is the most ever for a software firm, and have raised the overall value of their firm to $70 billion. Further to this, Snowflake managed to trade above its opening share price of $120 to a high of $245 on opening day, which is a 111% increase, despite not turning a profit once. However, this is not sustainable, as sooner rather than later the company will have to start becoming profitable in order to retain not only its high share price but also their investors trust in them. Otherwise they will see a lot of investors leave resulting in a reduced share price.
As we begin to draw close to the end of a turbulent 2020, we are still seeing the influx of companies coming to market. It should be interesting to see if this trend continues into 2021 as we are still yet to face the presidential elections which will no doubt cause fireworks across the globe.