Why Some Institutional Investors Don't Like Snap Stock Post The IPO

Snap Inc's no-vote policy for listed shares may cost the company in terms of support from institutional investors.

why some institutional investors dont like snap stock post the IPO
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Shares of Snap Inc (NYSE:SNAP), the California-based maker of the messaging service Snapchat, exploded on debut, gaining by over 40% over its IPO price on day one. The stock continued to pile on gains over the following day as well. However, Snap shares have lost momentum since then, falling by over 25% from their peak. While investors who bought shares through the IPO are still sitting on decent notional gains, this scenario could well be short lived. We've been suggesting all along that investors would do well to exit Snap stock post the IPO. It's always been a very risky bet. But now, with the CII pushing to ensure that Snap isn't included in stock market indices, Snap's shares could become even more risky.

Why Snap stock may not find a place in market indices.

The Council of Institutional Investors represents pension funds, among other large institutional investors. And according to a report by Reuters, the group is asking index providers like MSCI and S&P Dow Jones Indices to leave Snap stock out of their stock benchmarks and indices. Why? As it appears, this group of investors isn't pleased with Snap Inc's decision to issue shares which carry absolutely no voting rights. It's not uncommon for tech companies to issue shares with differential voting rights. In fact, some of the biggest, best known companies have done pretty much the same, like Alphabet Inc, for instance, which has more than one class of shares. So why is Snap different? There's a seemingly small difference between what Snap and some of the other tech companies have done in the past, but when you take a deeper look, that difference is bigger than it seems initially.

Take Alphabet Inc's case, for instance. While the company has shares with differential voting rights, what's worth noting is that shares with voting rights are still available for those who want them, unlike in the case of Snap. Whether such votes are of consequence, given that promoters hold shares with a veto power of sorts, is a different matter. In fact, Alphabet Inc's move to use shares with differential voting rights was also received with its fair share of skepticism. After all, why would an investor want to cast a vote, knowing that the management would have its way anyway. However, as is commonly the case, there's another way to look at this. At the very least, investors do have a voice. And in a scenario where shareholders do disagree with the management, the leadership is obligated to listen, if not comply. After all, nobody wants shareholders selling shares in a huff. But Snap Inc has simply taken away shareholders' right to be heard.

David Blitzer, managing director of S&P Dow Jones Indices raises an important point, " 'Who Votes?' is the issue right now,". At large, it's probably true that not a lot of common individual shareholders use their right to vote. Then again, you could argue that having the right to vote if you want to is better than not having the option at all, irrespective of whether or not you exercise that right on a regular basis. Besides, if you look at a case like Alphabet Inc, the company's shares with voting rights do carry a premium, albeit a small one.

Why does this matter to institutional investors?

Why is this group of institutional investors looking to get Snap Inc barred from inclusion in indices like the S&P 500? There are a couple of reasons. For starters, a lot of institutional investors like to exercise their rights to vote, and if they can't vote, they'd rather not hold such shares. However, if Snap does find a place in an index, then any funds that track these indices have to buy and hold shares of the company by default. Secondly, as Ross Kerber of Reuters mentions in the same post, at least some big investors fear that "other companies might copy Snap's structure."

Those who aren't amused with this sort of a structure most certainly wouldn't want Snap to set a precedent for IPO candidates in the coming years. As for shares of Snap, exclusion from these indices could mean lower default support from some big institutional investors eventually. Luckily for the Council of Institutional Investors, it's not always very easy to find a spot in indices like the S&P 500. As Blitzer points out, "a stock typically needs a market capitalization of around $5.5 billion and to have been profitable over the past four quarters" to be a part of the broad based S&P 500.

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Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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Comments on this article and SNAP stock

gr1800
bearish
Don't like the NO VOTE policy.
reply
Do share this awesome post