What could go wrong with Airbnb’s IPO

The Big Story

Airbnb's IPO is full of compromises

Back in March, everyone was pretty certain that Airbnb's plan to list this year was dead as dead can be. And yet here we are! On Wednesday, the company announced that it's confidentially filed for an IPO. But the listing looks like a giant game of compromises, coming as it does amid the worst environment for the travel sector in living memory, and that means it's not quite a done deal just yet.

If Airbnb wants to do right by its employees, it has to list now. As The New York Times points out, a tranche of early employees' equity is set to expire in November, and a bunch of restricted stock units expire next year according to The Information. As exercising options often comes with hefty tax bills, many employees need to be able to sell their shares to pay those taxes — meaning the company has to be public for those employees to be able to cash out. RSUs, meanwhile, often don't vest at all until a liquidity event.

But what happened to the much-rumored direct listing that Airbnb was planning? I mean, bluntly, its financials happened: Bloomberg reports that Airbnb's revenue was down 67% year-on-year last quarter.

• Direct listings, remember, only allow secondary sales, and don't allow companies to raise money. Rainmaker Securities' Glen Anderson told me via email that the decision to IPO is "likely because it needs the extra capital. Its business is still quite weak due to COVID." Henry Harteveldt, president of travel research company Atmosphere Research, pointed to Airbnb's recent debt issuance: "An IPO might provide them with some funds that they can use to pay down some of that debt," he told me.

But picking an IPO over a direct listing brings other issues, and potential headaches for Airbnb employees looking to cash out. Meg Bartelt, the founder of Flow Financial Planning, has seven clients who hold Airbnb stock and told me that the lockup periods associated with IPOs (which don't exist with direct listings) "definitely" cause problems.

• "If you have options that are expiring soon, and the expiration date happens to land inside the lockup period, it might be the case that you simply lose those options," she said, adding that there might be an exception carved out in the S-1 to avoid that.
• The bigger problem is for those RSU holders, she said. If Airbnb follows in Uber's footsteps, those RSUs will vest the day it lists. That means people will owe income tax that day, but won't be able to sell their RSUs until the lockup period's over. The timing will be crucial: A typical lockup period is six months, which, depending on when Airbnb lists, could take shareholders past the April 15 tax filing date.
• That might not be an intractable problem, though. Lise Buyer, the founder of IPO consultancy Class V Group, noted that "we're seeing significant flexibility with lockup structures in 2020 that we really hadn't" before, with some companies allowing employees to sell a percentage of their shares after the first month.

Given the specific circumstances of Airbnb's situation, it seems these compromises can't be avoided. And things could certainly be worse: Charuta Fadnis, SVP of research at travel analyst firm Phocuswright, told me she "would expect there is an appetite [among investors] for Airbnb," citing its strong brand. And Harteveldt pointed to the "blazing hot" market, especially when it comes to tech.

• As far as specific numbers go, Anderson, who deals with private secondary market trades, said that "Six months ago Airbnb was trading around a $45 billion valuation. Two months ago, we saw it trading as low as a $25 billion valuation. Today, it is trading at around a $28 billion valuation."

The coming weeks will show what public investors think. The travel industry, Airbnb included, is still subject to a huge amount of uncertainty, with Oppenheimer analysts warning Booking Holdings investors of the risks of "unfavorable Phase 3 data from the leading vaccine candidates."

• If that does happen, Airbnb could well decide to postpone its IPO: Buyer told me that the cost of doing so is small enough that it wouldn't be too difficult a decision.
• So employees and investors shouldn't assume this is a done deal: Airbnb's IPO is still very much up in the air.

Overheard

• "Fortunately, [valuations are] not at similar nosebleed levels, which prevents the market meltdown scenario of 2000-02." — Citi strategist Tobias Levkovich said that the market's all-time highs, led by tech stocks, were worrying. Just not as worrying as they could be.
• "The people who drop off during this period tend to be the ones not already in the insiders club." — Brooklyn Bridge Ventures' Charlie O'Donnell said that reduced seed funding decreases the size of the talent pool, and is "bad for innovation."
• "The sight of 10 lenders constantly phoning and sending letters to get money that might otherwise be used for food is unedifying at minimum, and I'm not going to participate in that land grab." — Curve Credit's Paul Harrald told me that he's going to take a longer-term view of collections with his new lending product.
• "If the Chinese investors are the ones with actual influence over the company, we will recognize it as a Chinese company even if it claims itself as a foreign company." — Taiwan Investment Commission's Su Chi-yen explained new rules which will scrutinize Chinese investment in the region.

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Up To Speed

• Monday: American Express bought Kabbage. Oracle was reported to be in acquisition talks with TikTok. Amazon was reported to be in talks to invest in Rackspace. JD.com earnings beat expectations. Robinhood raised $200M at an $11.2B valuation. Tencent invested in Voodoo at a $1.4B valuation.
• Tuesday: Reliance Retail acquired a 60% stake in Vitalic for $83M. SpaceX raised $1.9B at a reported $46B valuation. TakeTwo acquired Playdots for $192M. Seated acquired VenueBook. Canoo said it would go public via a SPAC merger. PharmEasy proposed a merger with Medlife. Catcher Technology sold two units to Lens Technology for $1.4B. Ant Group was reportedly planning a consumer lending platform.
• Wednesday: Apple's valuation hit $2T. Nvidia earnings beat expectations. Asana reportedly picked the NYSE for a direct listing. ThredUp was reportedly planning an IPO. Omio raised $100M, with plans for travel M&A.
• Thursday: Alibaba earnings beat expectations. Waterdrop raised $230M at a reported $2B valuation. Uber partnered with NimbleRx. MobileIron was reported to be considering a sale.

Diving Deeper

M&A is 'charging ahead'

If the early days of the pandemic gave some of you tech executives second thoughts about piling into deal-making this summer … well, it hasn't lasted.

Marc Suidan, the tech, media and telecom deals leader at PwC U.S., recently told me that the outlook for M&A is surprisingly busy. "Nobody seems to be holding back," he said, adding that all his clients "seem to be frankly charging ahead and want to do stuff."

• That's a big change from earlier this year. Back in April, Suidan said, deal activity paused as everyone waited to see how bad things would get. "I think now they all feel like they got their feet settled," Suidan said. "They kind of understand better where they landed."

Actually, people are being very choosy. Deal-making isn't being fueled by Big Tech picking on the caracasses of COVID-hit companies: "I don't see a lot of distress in this sector," Suidan said, saying that buyers don't actually want really cheap assets.

• But Big Tech is still buying, despite looming antitrust action. Though Big Tech might be warier of buying companies for market share, "all of them are acquiring in spaces that are outside their core," Suidan said. "That doesn't get a lot of antitrust scrutiny."

And if you're in the mood to buy, then it's worth keeping an eye on divestitures. "You do have a lot of companies thinking through what is not core, and how to get rid of that," Suidan explained, saying that half of his portfolio projects have a divestiture component to them. "Everybody's looking to optimize things."

Get ready for a deal-heavy fall, in other words. "I don't think anybody's planning on taking their foot off the pedal," Suidan said.

Coming Up

• Epic and Apple have a virtual court hearing on Monday, around Apple's decision to suspend Epic's developer account. It's at 3 p.m. PST, and you should be able to watch it here.
• Meanwhile, earnings just don't stop: Salesforce, Intuit, Autodesk, HPE and Best Buy report Tuesday, followed by Splunk on Wednesday. And on Thursday we've got VMWare, Dell, HP, Marvell, Okta and Afterpay.

A MESSAGE FROM PHILIPS

Stronger care … from anywhere, to anywhere

A strong healthcare system can scale to meet increasing patient demands. At Philips, we're charting a new way forward by moving care beyond the hospital's walls with advanced virtual health capabilities that expand clinical reach and increase care team capacity.

Learn more.