Breakingviews: Unity Software diversifies its IPO options

The options for companies going public are diversifying. The latest wrinkle comes from Unity Software. The company, which makes software that is used to create video games, is due to price its initial public offering on Thursday and trade on Friday. Unity’s fast growth should be in heavy demand, and at the top of the estimated price range for its shares, its market capitalization would be $11 billion. The company is tweaking the traditional IPO process, but this option is probably only open for highly sought-after firms.

Critics of traditional floats say underwriters and investors participate in many floats, while individual companies only do so once. That incentivizes bankers to underprice IPOs to ensure a first-day pop and lure purchasers for the next one. Allocating more shares in hot IPOs to frequent buyers is another way to encourage them. And because companies want their single chance to be a success, they have little choice but to pay America’s relatively few top investment banks high fees.

Unity’s innovation, in conjunction with underwriters Goldman Sachs and Credit Suisse, is asking buyers to submit offers on how many shares they wish to buy and at what price, according to a person familiar with the process. Multiple bids can be put in. It’s somewhat similar to a Dutch auction, in that it illustrates the demand curve clearly for the issuer of shares. Unity will then pick the price it prefers. Bidders above that price will receive shares, but Unity will also be able to allocate extra shares to favored buyers.

This should make the usually obscure underwriting process much clearer to the seller of shares. It may not, however, be for everyone. Unity is a hot property: Along with rival Epic Games, it dominates the business of software to build games. The same software can be used to create other virtual environments for businesses ranging from architecture to engineering, which helps explain a target valuation of a whopping 15 times trailing sales.

Less well-known companies might not be able to rely on buyers putting in aggressive bids. Unity’s method should mean less money is left on the table, but for other candidates it could just scare investors off. Exchanges are separately developing ways to adapt direct listings, a different approach for companies wanting to go public, to include selling new shares to raise capital. The game of going public is evolving.

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