By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
Crazy valuations – even after a recent dip – are not the only signal that parts of the U.S. stock market, particularly internet companies, are in bubble territory. The willingness of investors in hot initial public offerings to accept second-class stock and governance that favors insiders suggests an imbalance between providers of capital and its consumers. Add head-scratching market caps based on contorted metrics, and this risks storing up trouble when the inevitable headwinds arrive.
The best description of the stock being hawked in this way is “coattails equity.” It offers little beyond a chance to tag along with entrepreneurs from Wall Street, Silicon Valley and China. Buyers of shares in IPOs such as those of Box, GrubHub, Moelis & Co, Virtu Financial and Weibo – and probably $100 billion-plus giant Alibaba – must give up rights that have traditionally accompanied the ownership of common shares, like a representative voice in corporate decisions.
It’s a big shift in the paradigm of stock ownership, and it could make the next downturn trickier in some ways even than the tech collapse at the turn of the millennium. The most obvious governance problem is a multiplicity of classes of shares. Weibo, the Twitter-like service of Chinese internet conglomerate Sina, is selling Class A shares in New York. These take a back seat to the B shares that Sina will continue to own and which carry triple the votes.
That’s nothing compared to Box, the company Aaron Levie founded in his dorm room. Box sells a service with not very obvious barriers to entry that allows customers to store their digital files on the internet. Box’s Class A shares have just one-tenth of the votes that attach to its Class B shares, which should allow Levie and his backers to call the shots long after their economic interests shrink.