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This IPO fail is a warning for the ‘everything wins’ rally

In recent months, investors haven’t been able to pile quickly enough into the fast-growing companies hitting public markets.

But the mood was different Wednesday in London, where shares of Amazon-backed food delivery service Deliveroo dropped as much as 30% in their first day of trading. The plunge wiped out roughly £2.3 billion ($3.2 billion) in market value.

Deliveroo’s stock was last trading at around £3.00 ($4.14), about 23% below the price at which shares listed. The £3.90 ($5.36) IPO price was already at the bottom of the company’s targeted range.

Sophie Lund-Yates, an equity analyst at Hargreaves Lansdown, said there appear to be a few reasons the IPO ran into trouble.

Another food delivery service, DoorDash, saw its shares soar 85% in their first day trading on the New York Stock Exchange in December. But since then, markets have become more unpredictable, as investors try to assess the effects of an expected increase in prices later this year. Deliveroo cited “volatile” market conditions when it priced at the low end of its range.

There’s also growing concern about regulatory action surrounding gig economy companies. Uber is reclassifying its 70,000 drivers in the United Kingdom after the country’s Supreme Court upheld a ruling they should be classified as workers and not independent contractors. Its drivers will now be entitled to a minimum wage, vacation time and a pension.

Several large institutional investors, including Aberdeen and BMO Global Asset Management, said last week that they would not participate in Deliveroo’s IPO because they had concerns about competition, regulation and the way the company treats its delivery riders.

“If the government turned around and said it needed to treat workers as employees and include a mandatory 5% pension contribution, for example, that path to profitability for Deliveroo [becomes] incredibly murky,” Lund-Yates told me.

There are already worries about its projections for growth, she added. When normal life resumes after the pandemic, will there really be as many people ordering food to their front doors?

“Conditions over the last year are as good as they are ever going to be,” Lund-Yates said.

She believes investors may have been a bit more forgiving if the company had listed on the Nasdaq in New York, instead of on the London Stock Exchange, since investors there are more used to loss-making companies.

But the message is still clear: The IPO market remains hot, and investment bankers are incredibly busy. Investors, however, may be proceeding with more caution — indicating that rich valuations may require a second look.

My thought bubble: The past year has been defined by an “everything wins” rally, with a hugely diverse range of assets netting solid returns. Yet as we enter a period of greater uncertainty with clear signs of froth, it’s crucial that traders do their homework before making investment decisions.

Biden to lay out first piece of infrastructure and jobs package

President Joe Biden will lay out the first piece of a sweeping infrastructure and jobs proposal Wednesday, with the White House launching its effort to pass proposals that will total between $3 trillion and $4 trillion, according to senior administration officials.

Biden, who will detail the infrastructure and climate piece of the proposal in Pittsburgh, is set to focus on repairing the country’s physical infrastructure while pushing for significant investments in climate infrastructure and research and development, my CNN colleague Phil Mattingly reports.

The proposal will mark the first step of what are expected to be lengthy negotiations with lawmakers on Capitol Hill, where Democrats have worked through their own versions of several key pieces of the proposal and are also drafting pitches of how to cover costs.

The first prong of the White House pitch will be financed in large part through business tax increases, including an increase of the corporate rate to 28% from its current level of 21%. Increases in the global minimum tax, ending federal subsidies for fossil fuel firms and a requirement that multinational corporations pay the US tax rate are also on the table.

Biden has pledged not to increase taxes on families or individuals making less than $400,000.

Watch this space: The legislative effort comes as economists warn about the need to address the climate crisis with growing urgency. Nearly three-quarters of economists, or 74%, agree “immediate and drastic” action is warranted to curb emissions, according to a survey released Tuesday from the Institute for Policy Integrity at the NYU School of Law. That’s up sharply from 50% in 2015.

“People who spend their careers studying our economy are in widespread agreement that climate change will be expensive, potentially devastatingly so,” Peter Howard, economics director at the Institute for Policy Integrity, said in a statement. The institute said the survey is likely the largest of its kind.

‘Voltswagen’ disaster shines a light on electric vehicle mania

In a move intended to reflect its new push into electric vehicles, Volkswagen’s US arm said Tuesday it was changing its name to “Voltswagen.” Yes, really. Except, not really.

On Tuesday afternoon, the company admitted that the whole thing was a tongue-in-cheek deception that had turned into an utter disaster, my CNN Business colleague Peter Valdes-Dapena reports.

“Volkswagen of America will not be changing its name to Voltswagen,” the company said in a statement. “The renaming was designed to be an announcement in the spirit of April Fool’s Day, highlighting the launch of the all-electric ID.4 SUV and signaling our commitment to bringing electric mobility to all. We will provide additional updates on this matter soon.”

The debacle began Monday when Volkswagen of America briefly posted an unfinished press release announcing a plan to change its name to Voltswagen. Then, on Tuesday morning, VW posted a finished release. The company presented it as a straight, 100% true announcement — even though it wasn’t.

The confusing episode caught the attention of some overeager investors. Shares of the carmaker jumped 4.7% in Frankfurt on Tuesday. They’ve dropped 0.5% in early trading on Wednesday.

It’s a sign of just how much hype electric vehicles are generating as Wall Street tries to capitalize on a shift away from the internal combustion engine. Even before the debacle, Volkswagen shares were up nearly 50% this year. Stocks in General Motors and Ford, which have also announced transition plans, have jumped more than 40%.

Up next

Walgreens Boots Alliance reports results before US markets open. Micron follows after the close.

Also today:

  • The ADP private employment report for March posts at 8:15 a.m. ET.
  • The latest data on US crude oil inventories follows at 10:30 a.m. ET.

Coming tomorrow: Initial US unemployment claims for last week.

Article Topic Follows: Money

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