The marked slump in tech IPOs in the US seems to finally be at an end following UK-based chipmaker Arm’s public offering. The company made its comeback to the public with 95.5 million shares with an opening price of $56 on 14 September this year. At closing, share prices climbed to $63.59. Arm’s IPO also marks the largest this year – and the biggest in the tech industry since 2021. Opinion on the aftermath is divided. According to some, the gods are finally smiling down on big tech again, while others are yet to be convinced that the industry is yet to enter into its redemption arc following the post-COVID slump. Arm Holdings for its part at least seems to be optimistic for the future as its microprocessors, GPUs, and NPUs continue to dominate the market in all classes of computing devices.
According to some news media at least, the company’s decision to proceed with the listing in the US is due to a desire to deliberately snub the UK through its business activities. A potential motive for this could be the UK government’s interference in stopping the sale of Arm Holdings to US company Nvidia. The deal, which valued Arm at $40 billion was stopped over competition concerns last year. Ever since successive British PMs have sought to convince Arm to list in London. This was as part of a plan to make England the market of choice for tech companies. Arm Holdings has rejected its part in this programme for now, instead promising to maintain its headquarters, operations and material intellectual property in the UK.
Arm listing celebrated in the US as the end of the drought for IPOs
However, the listing was much cause for celebration in the US as it looked to mark the abstinence of major tech IPOs on the Nasdaq for close to two years. Recessionary fears and high-interest rates in the market are behind the lack of initiative for new IPOs on the market. It is likely the hope of many US investors and companies alike that Arm’s listing would provide the signal for other companies to come out of their respective corners to enter the market. So far, investors have also remained from taking a gamble on the open market considering the uncertainty in the economy on both the national and global levels. Their investment portfolios too reflected this attitude as they focused mostly on hedging potential risks over penetrating growth markets.
It looks as if this reading may have more than just a grain of truth in it. Grocery delivery startup Instacart and data and marketing automation Klaviyo filed for their own IPOs the day following Arm’s IPO. Despite brisk demand, industry analysts warn that this interest may only be at the expense of heavy discounts. Instacart’s opening valuation for example was 75% below the valuation for which it raised cash back in 2021. Klaviyo’s is 13% less than its last funding round in the middle of 2022. The shaving off of value is representative of the subdued market interest in tech since the official end of the pandemic – not without good reason. None of the 15 highest-valued companies in the U.S. showed positive gains in 2021. Microsoft’s market cap shrunk by $700 billion in the same year – Meta by $600 billion. The total losses for tech investors in 2021 amounted to $7.4 trillion.
Tech companies go into hibernation following the end of the pandemic
There were macroeconomic factors to this rapid constriction as well. Interest rates which had been lowered to insulate the economy from the stagnation effects of the pandemic were once again raised by the government, and inflation pressures have only continued to grow. The effects were immediate and visible in the tech industry. Meta laid off 11,000 employees in the first half of 2021, and the trend is not exclusive to the time period, or to Meta alone. Microsoft let go of 10,000 personnel at the beginning of this year. Total Twitter, now X, layoffs by the end of 2022 amounted to close to 29,000 employees. Meanwhile, HP has made a statement that it is also joining the ranks of ignominy by laying off 4,000 to 6,000 personnel over the course of three years. Government support was closed off immediately following the pandemic, and public enthusiasm was directed at returning to the physical world, not the virtual, a fact that most tech companies failed to account for. Projects that sought to capitalise on the interest in virtual business, socialisation, and entertainment were quick to crash and burn, under the safety of carefully constructed PR efforts to save face.
Even Arm Holdings PLC is not safe
Arm Holdings owner SoftBank also based its decision to list the company following losses numbering in the billions after SoftBank pursued aggressive and mistimed investments in companies that never saw returns in markets abroad. Fortunately, the market reception for Arm is positive, due to its stake in practically every computing device in existence due to its decision to pursue an IP business model since its earliest beginnings. According to some analysts, the uptick in interest is also due more to investor interest in AI rather than interest in tech IPOs. But while AI is witnessing considerable interest, there are also some who make comparisons between AI and the dot.com crash. Market interest has certainly been resuscitated, but investors aren’t buying into it at the scale that was seen just before the dot.com bubble burst. Arm also has the safety net of its small public float of 10%. It also has a prenamed group of strategic investors in tech to further cushion future blows.
Both Arm and other tech companies looking to test their potential on the open market have to be wary of overstating their earning potential while ensuring that company forecasts remain positive. It is clear that investors are no longer prepared to stake substantial capital at the expense of volatile risk factors. Startups and mature markets alike can no longer count on venture capital to subsidise their growth. The public market is also no longer entertaining high investments for companies to burn through in pursuit of growth. On the flipside, listed companies can also no longer count on the public market to buy out a liquidity crisis. While investing is all about taking risks, it seems that the appetite for risk in the tech industry at least, has never been lower.
(Theruni Liyanage)