January 30, 2015
The "Successful" Shake Shack IPO
Posted by Christine Hurt

I've never been to a Shake Shack.  I believe this fast casual restaurant operates in other parts of the U.S. and abroad, but its website has been down all morning.  Why?  Because Shake Shack is having a whiz bang IPO.  After just a few hours on the board (it debuted last night), SHAK is up 132%.

Readers familiar with my scholarship and rants know that, unlike the rest of the world, I don't see that as a successful IPO.  Instead of selling its shares at $21, Shake Shack (the entity) could have issued shares for almost $50.  The difference there was left on the table, just as if you sold your house for $200,000 yesterday and the buyer sold it with no modifications today for $500,000.  I wouldn't think of that house sale as successful, even if it was quick and I thought it was worth only $200,000.  I would be steaming mad.

But the founder of Shake Shack isn't steaming mad because he still owns 21% of the company, and his shares are worth over $50 now.  As he sells into the market (presuming he does it before the price drops), he will get more cash.  But Shake Shack (the entity) doesn't.  It now must grow, expand, wrestle with the challenges of being a public company -- all with the capital it raised at $21/share.

Not to beat a dead horse, but even the author of the Forbes article linked above seems to be unclear about what a successful IPO is.  The author recognizes that Potbelly's share price is now just 2% higher than its IPO price, but "IPO buyers had their chance to exit with profits after the stock popped 120% on its first day of trading."  That is not really a ringing endorsement for the efficiency and substance of capital markets.

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