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Case Code: FINC124
Case Length: 14 Pages 
Period: 2017- 2018    
Pub Date: 2017
Teaching Note: Available
Organization : Snap, Inc.
Industry : Technology; Social media
Countries : US
Themes: Financial Management/Corporate Governance  
Case Studies  
Business Strategy
Human Resource Management
IT and Systems
Leadership & Entrepreneurship

Snap, Inc.'s IPO and the Corporate Governance Controversy

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Snap needed both financial and non-financial resources to come up with a breakthrough in the hardware segment as it was still relying on its flagship product, the ‘camera app’. In order to keep up with the competition, the co-founders of the company decided to monetize the platform. In February 2017, Snap filed its IPO with the SEC to be listed under the “SNAP” ticker on the New York Stock Exchange (NYSE). Snap’s IPO provided anyone in the financial markets with a chance to purchase its stock. The company expected to raise at least US$3 billion from the share offering, which would give the company a valuation of between US$20 billion and US$25 billion. Compared to the valuations used for some of its peers, Snap’s US$25 billion valuation would mean a ratio of 62 times its Financial Year 2016 sales ...

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The intended IPO of Snap underlined a simmering issue being heavily debated and criticized in corporate circles. The deal-breaker for many investors was not Snap’s valuation; rather, they were concerned about the fact that they would not have any voting rights. The concentration of voting power in the hands of the co-founders meant that investors would have no authority to question their business decision and the goal of creating firm value might get undermined by vested self-interests, analysts said. Anne Simpson (Simpson), a leading governance expert at the California Public Employees’ Retirement System (CalPERS), described the company’s share structure as “a banana republic approach” to corporate governance. .
Amidst wider criticism after the IPO filing, Snap went public in March 2017 and priced its highly anticipated IPO at US$17 per share, above the marketed range of US$14 to US$16 a share. At US$17 a share, Snap had a market value of US$24 billion; more than double the size of rival Twitter Inc. and the richest valuation in a US tech IPO since Facebook in 2012. Pushing aside all the valuation concerns, the company opened trading at a price of US$24 per share, 41% higher than its offer price of US$17 per share, and closed at US$24.48, giving the company a market value of approximately US$34 billion. The IPO book was oversubscribed by more than 10 times, indicating a strong demand and hype for the shares. Snap sold 200 million non-voting shares, raising a total of US$3.4 billion at its flotation...
While Snap’s governance structure drew some criticism for not giving voting rights to its stock market investors, some observers close to the company argued that investors could “vote with their feet” by not buying into the IPO if they were not comfortable with the arrangements. Although non-voting shares offered few incentives to investors with no prospects of dividends in the short to medium term, it would help the company avoid proxy fights and tender offers, they said...
Snap listed the risk factors while filing the IPO stating that its non-voting stock offering might be unpredictable. The company stated that “We therefore cannot predict the impact our capital structure and the concentrated control by our founders may have on our stock price or our business.” Snap, further, made it clear that the company had no intention of paying cash dividends to its shareholders for the foreseeable future. Despite its being a loss-making company with the warning that it “may never achieve or maintain profitability,” and offering no-voting power, investors bought the shares...
Despite concerns about the company’s governance structure and slowing user growth over the years, Snap’s IPO was considered highly desirable by money managers. Rohit Kulkani (Kulkani), head of SharesPost Research , wrote, “Snapchat has captured the hearts and minds of this demographic by being fundamentally different from Facebook and Twitter. Snap’s unique hold on Millennials is partly responsible for its lofty valuation.”..
Exhibit I:Features of Snapchat.
Exhibit II: Comparison of Revenue, Operating Margin, and Market Share of Snap with Rivals.
Exhibit III: Snap’s Consolidated Statement of Operational Data.
Exhibit IV: Price-to-Sales Ratio – Snap vs. Rivals.
Exhibit V: Share Structure of Snap (Beneficial Ownership before the Offering).
Exhibit VI : Excerpts from CII’s Letter to Snap.