This quote in an article about Zynga blocking sales of stock through secondary markets caught my attention:
As we have been consistently reporting on SecondShares, we believe we are now witnessing the emergence of a more liquid marketplace akin to how markets like the high yield market got started in earnest in the early 1990’s, post the Drexel Burnham Lambert collapse. The preferred venue of trading today in the shares of private companies that enables these companies to be friendly to their employees, VC’s, founders etc. by permitting liquidity to flow is now being shaken out.
I recently had a discussion with someone about Facebook and I made the comment that with a secondary market providing liquidity for their stock and a unique ability to tap debt markets if they chose to, Facebook is in a pretty enviable position of not only being the only private company that Google cannot afford to acquire but also a company that can successfully avoid going public.
The interesting thing is that there is an entire tier of private companies that find themselves in a similar situation, Zynga being among them. This really is a story about liquidity at it’s core and what happens when large public tech companies find their the majority of their float being held by large institutional investors.
Salesforce.com (CRM) is a good example with 92% of the stock being held by institutions and 50% of that being held by just 10 institutional investors. This hasn’t exactly been a bad thing for Salesforce, which has outperformed Google (GOOG, 78% and 33%) and Microsoft (MSFT, 62% and 21%) by a pretty wide margin however it has trailed Apple (AAPL, 70% and 25%) by an equally significant margin. Amazon (AMZN) is 68% and 32%.
By comparison, I looked up a large cap mining stock, BHP Billiton (BHP) and 6% of the stock is held by institutions with 3% held by the top 10 institutions. Exxon (XOM) is 47% and 18%… Wal-Mart is 33% and 10%… clearly large tech stocks are absurdly dominated by institutional investors if for no other reason than the floats on tech stocks are smaller while the investors they cater to have very large amounts of capital to put to work.
Private companies that rise to the level of attracting secondary market interest may not be thrilled about it but these markets do serve as a useful pressure relief valve that enables insiders to achieve liquidity without putting the burden of being public on the management team. I doubt pricing is affected dramatically one way or the other because scarcity is a factor in public markets as well it does relief management of selling their view of the world to a handful of large institutions who have the power to move the stock price on any given day.
No matter what angle you look at this it is an interesting story and yet again we come to a central question about liquidity and availability in the public markets, where volume has been flat to down (15% in 2010) and with publicly traded tech issues halved in the last 10 years. No thesis, no conclusion… however it is an issue.