The IPO market has been stagnant for the past quarter, with companies choosing to wait for better conditions than jump into the turbulent stock market.
Now one company is making a move, though not on the NYSE or NASDAQ. Bats Global Markets Inc., a global stock exchange operator, has released its pricing details and has begun its roadshow to market its IPO to investors. The company has announced that it plans for its shares to be priced between $17 and $19, which could raise up to $212 million. Furthermore, Bats intends to have its stock traded on its own exchange for branding purposes and to show its desire to compete with the older stock exchanges.
This will not be the company's first attempt at an IPO. Over four years ago, Bats launched an IPO, but cancelled it on the same day due to a devastating glitch which saw several companies' shares fall to nothing in a matter of hours. While Bats corrected the glitch on the same day, it chose to postpone the IPO thanks to a loss in investor confidence.
A new stock exchange?
Bats defines itself as "a leading global operator of exchanges and provider of services for financial markets around the globe." Today, it purports to be the second-largest equities market operator in the United States, with four stock exchanges and an equity option market.
Finding a niche when the NYSE has dominated the markets for so long can be difficult. Bats claims that it uses technology to bring competition and innovation over its two older peers, and charges less than either. With companies launching an IPO almost forced to use one of the other two stock exchanges, this has created a potential duopoly which has concerned other businesses.
Bats has managed to secure a niche and become profitable through its market data and connectivity in addition to trade execution. In its SEC filing, Bats shows that its net income has risen from $46.8 million in 2013 to $82.2 million in 2015, along with a corresponding increase in revenue.
And as the company's profitability has increased, so has its valuation. Bats was valued at $760 million in its 2012 IPO. Today, it could be worth up to $1.8 billion.
Avoiding past mistakes
The most immediate concern which any investor into Bats will have is ensuring that the devastating 2012 glitch does not happen again. The company has conducted more than 50,000 tests of a potential listing and has tested demand for a theoretical stock with three times the shares traded when Facebook began trading in 2012.
These factors should show that Bats is strenuously committed to ensuring that the mistake does not repeat itself. But there are other concerning factors.
One thing to note is that Bats itself will not sell any stock. Instead, its private shareholders will sell stock and thus look to cash out of the stock which they own. This includes several major banks such as Citigroup, Credit Suisse, Deutsche Bank, and Goldman Sachs.
This does ask the question of why these banks are choosing to cash out now. And while Bats was founded in order to provide competition for other stock exchanges, further competition could squeeze into the fees which it has used to bolster its growth.
It should also be noted that while recent positive economic news such as the US jobs report seem to be a positive sign, there is still plenty of concern out there of a potential recession. If there is an economic downturn, it would affect a smaller stock exchange like Bats more compared to the great stock exchanges with their prestige and history.
Wait for the lock-up period
This may be a moment where it is best for regular investors to wait for the lock-up period to expire before making a decision to buy or sell. Given that the banks have already held Bats stock for some time, it will be almost impossible for investors to get in on the ground floor as is desired in an IPO.
Furthermore, waiting for the lock-up period to expire will let investors see whether the current fragile economy will turn for better or for not. While Bats's decision to jump in amidst this weak IPO market speaks well of its confidence, investors should exercise caution for now.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.