Snap spent cash of $206 million on acquisitions during the quarter ended June 30, 2017. Most of the cash – $196 million – went towards the acquisition of Zenly SAS which was instrumental in the launch of Snapchat’s social mapping feature.
In addition, Snap will also pay $17 million in “future employment services”. So in the end, Snap will eventually pay $213 million for Zenly SAS. Snap also made the purchase of $10 million for part of an undisclosed “social advertising software company” that was added to the Snapchat platform.
Another reported Snap acquisition did not closed until after the end of quarter. In recent SEC filings, Snap disclosed it paid $132 million in cash for advertising technology company, Placed, in July 2017. With the Placed acquisition, Snap still has $2.8 billion in cash and marketable securities.
Snap’s penchant for all-cash deals still leaves lots of dry powder for growing, at least, through acquisitions.
Snap is really good at exclusives.
On Thursday, Scripps announced its deal to bring shows to Snap’s Discover Platform. On the same day, the Wall Street Journal reported on the media companies – Disney and NBCUniversal – that are already producing content for Snap along with potential new ones such as Fox and CBS.
The Wall Street Journal even quoted Snap VP, Nick Bell, that Evan Spiegel was involved in the media companies’ efforts. News of media companies working with Snap isn’t really new: NBCUniversal parent, Comcast, is a late, but enthusiastic investor in Snap.
And it’s not unusual for the normally silent Snap to speak exclusively with the Wall Street Journal. In September 2016, the Wall Street Journal Magazine featured a piece on Snap’s newly released Spectacles that were modeled by Evan Spiegel.
Ahead of Snap’s earnings call next week, it’s also not strange that news comes of exclusive shows coming to Snap; proprietary content is something Facebook can’t copy.
Index providers – FTSE, MSCI, and S & P Dow Jones – are currently deciding whether and/or when Snap’s sole, zero-voting stock should be included in an equity index. After considering feedback from market participants, MSCI will deliberate Snap’s fate in May while FTSE will do the same in June. S & P Dow Jones’s decision will take a little longer.
S & P Dow Jones markets and maintains many indices, including its namesake, the S & P 500 Index. Inclusion in the index is done annually by committee. Currently, S & P is seeking comments from market participants on whether companies with dual class or non-voting shares should be included in the S & P Dow Jones indices. Market participants have until May 3, 2017 to complete a confidential online survey.
Pushing for index exclusion is the Council of Institutional Investors (CII), who is very angry with Snap. The CII does not like that Snap’s sole, zero-voting stock breaks with the tradition of giving investors a say in management in exchange for cash. In addition, the CII does not like that Snap’s stock lacks financial disclosure which was made permissible under the Jumpstart Our Business Startups Act of 2012.
On April 27, 2017, the CII made public its confidential feedback to S & P Dow Jones. Besides Snap, the CII is very angry with the NYSE for listing Snap’s sole, zero-voting stock and letting the dogs loose. The CII fears that other companies will issue non-voting stock or “Snap-lite” securities. Since stock exchanges are financially motivated to list companies, the CII believes index providers are their last chance to catch the runaway dogs.
On May 10, 2017, Snap reports its first quarter earnings as a public company and also as a Emerging Growth Company. That latter designation was one Snap received from filing under Jumpstart Our Business Startups (JOBS) Act of 2012.
Snap and other companies filing under the JOBS Act can take advantage of limited disclosure requirements that were enacted to encourage private companies to go public. For example, Snap is not required to have its internal controls audited, which is normally required of public companies after the Sarbanes Oxley Act of 2002.
On a quarterly basis, Snap’s filings will be similar to other public companies; on an annual basis, Snap will be different from other public companies. A year from now, Snap will need to present three year audit financial statements, but it is not required to report executive compensation information as long as it remains an Emerging Growth Company under the JOBS Act.
Cloudera plans to go public as an emerging growth company under the JOBS Act. Cloudera competitor, Hortonworks, filed under the same status with its initial public offering in 2014. When Snap recently did the same, investors were not too happy with its emerging growth company status.
Emerging growth companies can benefit from the limited public disclosures of the Jumpstart Our Business Startups (JOBS) Act. For example, under the JOBS Act, companies can choose not to provide information about executive compensation which is normally required of all public companies.
Cloudera intends to take advantage of the exemption from public disclosure including those related to golden parachutes payments made to executives. Like Snap’s shares, investors may not find Cloudera’s shares “attractive” due to the lack of transparency. Cloudera warned in the S-1 that the emerging growth company status may cause there to “be a less active trading market for our common stock”.
Cloudera can ditch the emerging growth company status after five years or when revenues exceed $1 billion. Two years after its IPO, Hortonworks is still an emerging growth company. As more private companies go public, investors, especially large ones, will need to navigate the corporate governance issues presented by the JOBS Act.
Snap’s stock falls in one full week of trading. Immature founders, Facebook, and limited user base get cited for the slow down, but may be no one likes Snap’s non-voting stock. Snap’s co-founders’ total control doesn’t sit well with large investors who are accustomed to having a say in management.
Snap warned investors of the dangers of non-voting stock in the prospectus. One risk is that the difference between non-voting and voting stock is so great, that the market may have trouble valuing the company. This would cause the non-voting stock to have a “lower trading price or greater fluctuations in the trading price”.
Snap summarized the risks by stating:
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….Nor can we predict whether this structure will result in adverse publicity or other adverse consequences…
When pursuing passive investment strategies, larger investors, who don’t want it, may still be forced to own Snap. That occurs when Snap gets included with other companies in a stock index, such as the S & P 500 or Russell 2000. In passive investing, investors follow the market, instead trying to beat the market; they do so by purchasing the entire stock market that is represented by the stock index.
To avoid accidentally owning Snap, the Council of Institutional Investors (CII) wants index providers to exclude the company. The CII also wants stock exchanges prevented from listing companies with solely non-voting stock; if that’s not possible, the CII wants the SEC to “bar future no-vote share classes”. Those demands were made public this week at the SEC where the commission was discussing Snap’s non-voting stock.
Large investors are very afraid that other companies will copy Snap and issue only non-voting shares. Passive investing is cheaper for larger investors than actively managed strategies, such as hedge funds or private equity. The CII believes that more non-voting stock would lead to “market confusion” and disrupt “simple passive approaches to investment”.
May be haunted by 1980s Steve Jobs, Alphabet and Facebook offered the public dual classes of stock to concentrate voting and thus control with the founders. Snap’s initial public offering was the first to issue only non-voting shares which upset large investors like pension funds and mutual funds. Arguments can be made on both sides, but missing from the discussion, like disappearing messages, is that technology disrupts incumbents and the status quo.
Snap founders, Evan Spiegel and Bob Murphy, want total control for “long-term stability” and to avoid, among other things, an unwanted take-over. Large investors take issue with the lack of votes since it doesn’t allows for holding management accountable. For example, investors may prefer an acquisition of Snap since it would increase their investment return. In addition, large institutional investors fear that other Unicorns will also adopt Snap’s non-voting share innovation.
Large investors also don’t like the potential lack of transparency at Snap. Snap filed under the JOBS Act as an “emerging growth company” which allows companies to limit public disclosure on such matters as executive compensation. In addition, Snap can choose not to have its internal controls reviewed by auditors, a requirement of the Sarbanes Oxley Act, intended to avoid future audit failures of the early 2000s. This is important because Snap already had problems with its internal controls.
While Snap’s decisions are still to be decided, the initial reaction from the public markets is positive. On its first day, Snap stock increased forty four percent over the offer price. In the prospectus, Snap warned investors that non-voting shares may not trade the same way as shares with voting rights; this means the non-voting shares may trade at a lower price and trading could be limited. Comcast didn’t seem to mind the non-voting issue either as it made a $500 million strategic investment in Snap.
On March 9th, the SEC looks into the issues raised by Snap’s public offering, but one advantage for Snap is lower costs. Kurt Schacht, who will be part of the discussion, said, “We’ll try to explore both sides. Is this is a slap in the face of corporate governance, or is this the market efficiency of the future?…”.
Like Snapchats, Snap employee salaries will soon disappear. On March 2nd, Snap employees earned about $400 million in restricted stock units (RSUs), per the prospectus. That’s $400 million of taxable wages, part of which goes to the taxman and what’s left goes to the employees. Normally, when employees are paid cash, then paying taxes is simple. Since the taxman does not take stock, then paying the taxes is harder with RSUs.
When employees get stock, then either all or some of the stock is sold for cash to pay income taxes; for Snap employees, some of their RSUs are being sold for cash. With the cash, taxes will be paid to the government. Snap is assuming its employees will owe the highest rate of the tax (47%) on the RSUs. So as of the IPO date, California will be geting $40 million and Federal government will be getting $160 million in income taxes from Snap employees.
After Snap’s stock soared today, the Chicago Board Options Exchange (CBOE) quietly announced the listing of options on Snap Inc. stock. Trading in Snap options starts on Friday, March 10th, about one week after Snap’s initial public offering. It’s the first time anyone will be able to short Snap, or win when the stock price is going down.
Options are unilateral financial contracts between an option buyer and option seller. An option gives the buyer the right, but not the obligation, to purchase or sell stock. Option holders have the right to purchase or sell a specific number shares of stock at specified price during specified exercise period. Listed options traded on an organized exchange and thus are different than stock options given to workers in exchange for services.
For the right to buy or sell stock, the option buyer pays the option seller a premium. Trading in listed options – selling or buying options – allows an individual to express a view on a particular stock’s direction. For example, if you think a company’s stock price is going down, then you would sell a call option. By selling the option, you receive a premium which you keep when the stock prices goes up and the call option is not exercised.
Snap joins Facebook in having listed options so soon after its initial public offering. The CBOE started trading Facebook options on May 29, 2013, about one week after its first public offering. CBOE also listed LEAP options on Facebook stock which have a five year exercise period. Listed options usually have a nine month exercise period. So may be Snap LEAP options will follow too.
Disclaimer: This post is for educational purposes only and should not be used for investment purposes. Short-selling should only be done by experts.
Before the WSJ reported on Spectacles, Snap took the trouble to set up Snap LLC in Nevada. Snap, Limited Liability Company, was formed on June 30, 2016 and registered for business in California as of September 19, 2016. Snap’s head of hardware, Steve Horowitz, is listed as the Chief Executive Officer of Snap, LLC on the California filing.
In another filing, Snap LLC got a reseller’s permit in Nevada. Then on February 13, vegasinc.com reported Snap LLC received a “general retail sales” license and the listed address is the Stratosphere. It appears Snap set up a subsidiary for selling the Spectacles based upon the timing and the filings themselves.
If that’s true, then Snap when through some work and money just for one product, unless there are other products to come or even a Spectacles store.