Whenever a stock makes a violent move, some people are ready to blame Wall Street manipulation for the volatility. There is an expectation that experienced Wall Street insiders "know" how much a stock is worth. As a result, when Wall Street price estimates turn out to be wrong, it's easy to criticize analysts and investment bankers for hyping (or sandbagging) the stock. But sometimes, Wall Street is just wrong. Many companies are very difficult to value, and so investors should not automatically assume foul play when stock prices jump around.
Zipcar (ZIP) is a good case in point. The car sharing pioneer had its IPO in April 2011. The initial pricing range was $14-$16, but strong demand led to a final IPO price of $18/share. Moreover, in its first day of trading, Zipcar rocketed more than 50% to close at $28/share. On the day of the IPO, Henry Blodget wrote that Zipcar's underwriters (Goldman Sachs (NYSE:GS) and J.P. Morgan (NYSE:JPM)) had fleeced the company in order to benefit their own clients. "By underpricing the stock, Goldman and JP Morgan gave their best institutional clients a gift of at least $50 million this morning. And that money came right out of ZipCar's pockets and the pockets of the Zipcar shareholders who sold on the deal." According to Blodget, Goldman Sachs and J.P. Morgan ought to have been able to gauge market demand and price the IPO at $22-$24/share, closer to the eventual closing price.
These institutional clients that supposedly benefited from the largesse of their investment bankers at Goldman and J.P. Morgan couldn't have been too happy by October 2012, when Zipcar was trading for $6. Indeed, it only took six months from the IPO date for Zipcar to drop below the $18 IPO price for the first time.
On Wednesday, Zipcar announced that it had agreed to be acquired by Avis Budget (NASDAQ:CAR) for $12.25 a share in cash. Investors who bought in at the IPO price (and especially those who bought during the IPO-day spike) will never have a chance to recover their losses. Seeking Alpha's Dana Blankenhorn wrote Wednesday that small investors in Zipcar had been "Facebooked" (NASDAQ:FB) by the investment banks. Just as investors lost billions of dollars by buying Facebook stock shortly after the IPO, investors who bought Zipcar in April 2011 have also lost a lot of money.
Blankenhorn makes a good point: small investors need to focus on results, and not be taken in by Wall Street IPO "hype." However, if Blodget (a former Wall St. analyst himself) was certain that Goldman and J.P. Morgan were underpricing the IPO two years ago, how can we now be sure that these banks were over-hyping the Zipcar opportunity? These stories cannot both be true! On the other hand, Zipcar is a company that is just reaching critical mass, with uncertain growth and profitability prospects. It seems likely that Wall St. bankers in 2011 had just as much trouble figuring out what Zipcar was worth as Main St. investors.
The urge to incriminate will live on. As of Wednesday afternoon, there were already at least nine law firms (here, here, here, here, here, here, here, here, and here) investigating the Zipcar Board of Directors for potentially selling too low. (Many more law firms have hopped on the bandwagon since, in the hopes of making a quick buck.) This happened even as the Wall Street Journal applauded Goldman Sachs for upgrading Zipcar to "Buy" in November partially due to the prospect of a buyout. Goldman's price target: a measly $8.75. On Monday, most Zipcar shareholders would have been willing to sell for far less than $12.25. Now that the Board has a deal at $12.25 in its hands, it is easy for outsiders to second guess Zipcar's board, management, and investment bankers.
The Zipcar buyout price was near the bottom of my $12-$15 fair value estimate range based on the company's prospects. However, given that Avis Budget shareholders (and bondholders) are now taking on all of the risk, I think $12.25 is a fair price. I gladly sold my Zipcar shares on Wednesday morning. I would suggest that other shareholders should be happy to get approximately fair value for their shares, rather than looking for fault. After all, Zipcar closed on Wednesday up more than 100% since early November. In the case of Zipcar, Wall St. hasn't been deceptive; it has just been wrong.