Trader Talk

A sigh of relief in IPO land

Jack Dorsey, CEO of Twitter
Lucas Jackson | Reuters

This morning, on CNBC...

CNBC's Carl Quintanilla: "Ramifications for unicorns?"

Square CEO Jack Dorsey: "I don't know."

Quintanilla: "You'll admit that you're a test, yes?"

Dorsey: "I don't know; I am not an economist. We have an economist on our board, Larry Summers, you should ask him."

Square's CEO did not want to answer my colleague's question about whether Square was a canary in the coal mine for all those "unicorns" like Snapchat, Dropbox, Pinterest, Airbnb and even Uber that may be preparing to go public in 2016.

But I'll answer the question: hell, yes!

The midpoint of the price talk for Square was $12. It priced at $9, a 25 percent discount.

If it would have opened at $8, you would have heard bodies dropping and cranes halted all across Silicon Valley. Valuations have already been cut and would have had to be slashed even more for future IPO candidates.

But it didn't. It opened at $11.20, briefly went over $14, and midday has settled between $12 and $13, up roughly 40 percent.

Talk about a sigh of relief.

So, now the inevitable question whenever there is an IPO pop: did they price it too low?

No. Pricing IPOs is an art, not a science.

In the case of Square, there were three big problems.

First, it doesn't make money, yet. No one is sure what the future earnings are going to be like. It needed an extra discount to address that uncertainty.

Second, the entire IPO market has been pressured by investors to lower prices. Square was not an exception.

Third, the bookrunners likely faced additional pressure because it was a bellweather for other unicorns. Every IPO is under pressure to launch, to go public. Square faced that pressure, but in addition, the bookrunners likely felt it was important to get some kind of pop, because if they didn't get one at the open — if it would have opened at $9, for example, right where it was priced — it's possible the stock could have quickly sold off. It then would have been a broken IPO, and the repercussions would have been enormous.

Remember, the hard part is done: going public. If they need to raise more money, they will sell more stock.

Finally, while this is good news for IPO investors, one day does not an IPO success make. Remember, Twitter closed its first day up 72%, and has since broken its IPO price many times.