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Market Pulse
Monday, September 18, 2023

Birkenstock, the oldest startup on Earth, the opportunity cost of going public, and a stark statistic

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.

In this week’s edition we have:

  1. The opportunity cost of going public
  2. Birkenstock, the oldest startup on Earth
  3. A stark statistic

Read the full Market Pulse below, or if you want to access it on the go, download the Sidekick app.

Adrian (Portfolio Manager), and the rest of the Sidekick team.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) The opportunity cost of going public

As Arm made its Nasdaq debut in the year's biggest IPO, many in the startup, investor, and banking community wondered: Could this British chip designer break the ongoing IPO dry spell?

The shares closed at $63.59 on the day, a 25% increase from the IPO price of $51, albeit it retracted to $60.75 on Friday. But the verdict was clear: the issue was a success, fueling hopes for Instacart [1], the grocery delivery startup and Kaviyo [2], the advertising tech company, which are expected to go public this week.

The last couple of years have been unsurprisingly tough for the IPO market: high interest rates, inflation and a general uncertain environment have pushed the number of new listings to historical lows. Nevertheless, a trend has emerged over the last decade: more and more startups are selling themselves to larger competitors rather than going public.

Some researchers from Boston University and the University of Maryland [3] have investigated what drives this trend. They concluded that the opportunity cost of going public has increased considerably in recent years, as startups must face higher hurdles to compete with the incumbents in their sectors.

From large marketing budgets to entrenched technologies, big companies have many levers to pull to make the life of a startup difficult. At the same time, early-stage investors demand relatively rapid progress. The result is that many disruptors are acquired by the companies that could be disrupted. The authors concluded that their findings are consistent with a hypothesis that startup acquisitions have contributed to rising oligopoly power.

In this context, it is no surprise that the Federal Trade Commission is expanding its reach by looking at all acquisitions by big tech, no matter how small they are [4].

2) Birkenstock, the oldest startup on Earth

Another company that stands to benefit from an IPO market revival is Birkenstock, the German sandal maker claiming to be the 'oldest startup on Earth' [5]. Its owner, L Catterton (a private equity group backed by LVMH), aims to list in New York during the week of October 9th at a valuation of more than $8bn, according to people familiar with the matter [6].

If it materialises, that valuation will put Birkenstock ahead of companies like Ralph Lauren, currently valued at $7.4bn and local peer Hugo Boss, which has a market capitalisation of $5bn. At a valuation of 5x enterprise value to retail equivalent revenues, Birkenstock would trade akin to a top luxury company like LVMH or Moncler.

In a previous Market Pulse [7], we discussed heritage as a necessary but insufficient ingredient in making a luxury brand successful. With roots dating back to 1774, Birkenstock has plenty of legacy. However, with an average price of around $100, it's still a mass-market product, albeit with luxury goods margins [8].

Many contemporary luxury brands have effectively broadened their original product lines by venturing into related categories, and Birkenstock has the potential to follow suit. Yet, it's worth noting that brands rooted in higher-priced product categories tend to navigate these expansions more smoothly. It’s no surprise that moving from upscale to more affordable segments is more straightforward than the reverse.

For example, it is easier for a couture brand like Dior to expand into handbags, which, in absolute terms, will cost a fraction of their evening dresses. However, it is challenging for a brand with a lower price anchor, such as Birkenstock, to expand into handbags because, in this case, consumers would have to trust the brand by buying into a much higher average price product.

The IPO market is reviving, and Birkenstock has its moment. Still, one should proceed with prudence, as if walking in sandals on a rocky path.

3) A stark statistic

If you've been caught up in the excitement of the recent IPO frenzy, here's a reality check: most of the hottest startup IPOs from the past decade are currently trading below their initial price.

A team led by Alexander Ljungqvist at New York University and the Centre for Economic Policy Research delved into the world of IPOs[9] to answer this puzzling contradiction. When companies go public, investment bankers often underprice the issue and the stock skyrockets on the first day, making them seem 'underpriced.' However, this initial excitement tends to fade in the following months, leading IPO stocks to perform worse than the overall market.

Hence, from the perspective of a longer horizon, IPOs can arguably be regarded as "overpriced" in the aftermarket despite the initial reaction. The authors suggest that "irrationally exuberant investors," coupled with short-sales restrictions, contribute to the initial underpricing and subsequent long-term underperformance of IPOs.

They show that the optimal selling policy, from the issuer's point of view, usually involves staggered share sales. The company can implement such staggered sales by allocating the IPO to cooperative regular investors who hold inventory for resale in the aftermarket.

Thus, don't be discouraged if you missed out on the allocation of the latest hot IPO. If history is any guide, it may be for your financial benefit in the long run.


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[1] https://www.reuters.com/markets/deals/instacart-raises-proposed-price-range-ipo-2023-09-15/

[2] https://www.reuters.com/markets/deals/klaviyo-leans-towards-raising-ipo-price-range-amid-market-euphoria-sources-2023-09-15/

[3] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4322834

[4] https://www.reuters.com/technology/ftc-staff-present-findings-big-techs-smaller-acquisitions-2021-09-15/

[5] https://www.sec.gov/Archives/edgar/data/1977102/000119312523233488/d541624df1.htm#rom541624_3

[6] https://www.bloomberg.com/news/articles/2023-07-31/birkenstock-owner-said-to-plan-september-ip0-at-8-billion-value

[7] https://www.sidekickmoney.com/market-pulse/prestige-and-profit-investing-in-luxury-goods

[8] https://www.ft.com/content/43f5755b-804c-4d89-b65f-8352e5d265bf

[9] https://www.jstor.org/stable/10.1086/503644

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