The Quicken IPO, Explained

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Today’s episode of your Daily Detroit dives into Dan Gilbert’s Quicken Loans — or Rocket Companies, as they’re going to be called moving forward — filing for an initial public offering on the New York Stock Exchange.

It’s not often that happens in Metro Detroit. An IPO is not a regular thing around here.

So what could it mean for the company going forward? The employees? And of course, Detroit?

Our guest expert to help unack this is Erik Gordon, a professor at the University of Michigan’s Ross School of Business.

And then we’ll share a couple of our thoughts at the back of the episode.

Below is a lightly edited transcript of the conversation with Erik Gordon that you’ll find in the podcast player below.

Sven Gustafson (SG): Professor Gordon, welcome to Daily Detroit.

Erik Gordon (EG): Oh, glad to be here.

SG: So Bedrock didn’t really specify its goals, but what would be the reasons for a company like Bedrock to go public? I mean, this is a company that we found out thanks to its SEC filings earned $894 million in 2019, which seems like things are going pretty good for them.

EG: Yeah, they don’t have to go public. They’re not desperate for money the way a lot of these little biotech companies that try to go public. They go public because they’re running out of money and they need the cash. Bedrock certainly doesn’t need the cash today. You go public for a couple of other reasons. One is to make it easier to get cash in the future, when you might need it. And I think all of the COVID slash economic uncertainty has led a lot of companies that don’t need cash today, to do something to either pile up cash that they can’t possibly spend in the next year, just to have it on hand, or to make sure they have access to cash if they might need it in the future. And you know, if you think back to the financial crisis, you can understand why Bedrock or any of these other companies would do it. Because during the financial crisis, great companies, companies that used to have banks, begging them, “oh, let us lend you some money,” couldn’t get their hands on 10 cents, liquidity froze. I think a lot of companies learn their lesson. So I think Bedrock is doing something safe looking towards the future. And then there’s the question of flexibility and liquidity for Dan Gilbert. You know, he holds a lot of assets that are not liquid. This could be a step towards more liquidity for Dan and his family.

SG: When you say that Dan Gilbert owns many non liquid assets, for example?

EG: Well, you know before when in public, this is not liquid, his real estate assets are not particularly liquid. You know, you can’t sell real estate or a lot of it quickly. He has a lot of real estate, you know, located in one city. So, he has a lot of wealth. I guess, you know, you could probably sell the Cavaliers pretty quickly, they’d be a line to buy, even the Cavs. My guess is that Dan’s advisors have been whispering in his ear for quite some time, you know, looking forward, you need to think about liquidity. And, you know, his more recent health incident may have made him listen a little bit more carefully to them.

Jer Staes (JS): Well, one of the things that I wanted to explore with that because covering his real estate, one of the problems he sometimes faced is that even he has trouble accessing lines of credit for his projects.

And a lot of things he’s had to self-finance and then offload to banks and the like, once you know, it’s already built or it’s already leased up to a point. And I know that that’s something that’s been a little bit challenging with doing his projects. Whereas in a lot of other cities, you kind of can arrange financers in different ways before you get started. With Dan’s Detroit work, a lot of it has been, you know, cash over the barrelhead, and it’s been his money doing it.

EG: Yeah, that’s the Detroit effect, you know, real estate projects, like the ones Dan does, you know, not a slam dunk in Detroit. Detroit is still seen as a very risky place to invest in real estate. You know, which makes what Dan has done in Detroit and his commitment to Detroit all the more remarkable. Because, you know, as you said, pre COVID, if you were building in New York or Chicago or Los Angeles, you know, the banks are falling all over themselves to lend you 102% of the value of the building, as opposed to Dan having to go out on the line until he can show that the building can be leased up. So you know, a brave guy, kind of the only kind of person who could succeed in Detroit real estate.

SG: So the proposed IPO would give Dan Gilbert, speaking of which 79% of the combined voting power of the common stock. Is that common for a company founder to write in a provision like that, and why is that significant?

EG: Yeah, it has been surprisingly common in the last decade. And it is, you know, it’s given rise to some controversy. So, you know, sometimes it’s turned out great. And sometimes it’s turned out terribly. You know, think about when Travis Kalanick was in control of Uber. That didn’t end well. Adam Neumann at WeWork didn’t end well. But sometimes it ends really well think of the Google guys. You know they were in control, Bezos is in control. This idea of you go public, but keep control. Or if you’re an investor, you know, you’re on the other side of the table. You buy stock in a public company and you have no control, the founder still has control. You have to have a lot of confidence in the founders abilities. And that the founder doesn’t turn out to be, you know, some kind of Looney Tunes sort of guy.

SG: How will going public change the company? I mean, we’re actually we’re talking about several companies here, obviously, and how they do business.

EG: So they put Quicken the big company, Quicken Loans into it. And then this whole grab bag of companies that are related to the businesses that Quicken does, and there’ll be a couple of changes. One, they’re going to have to reveal the finances and a lot of other details in ways they never had to do. Every quarter, they’re going to file extensive reports with the SEC and an even longer one once a year. And you know, you and I, and all of your listeners can go on the web and look that up. And it will include things including people’s salaries. So they’ll be revealing a lot of information that they were able to keep private, they’ll be under a lot more scrutiny. They’re gonna spend a lot of money on being a public company, because the kind of audits and the kinds of legal fees that you end up paying, you know, million-plus dollars a year, so it’s a new expense that they didn’t bear. But I think the big thing in this case, is, they’re going to lose their privacy. Because Dan is keeping control of, as you mentioned, 79%, which is really total control they’re not giving up control. But when you’re a private company, you enjoy being private.

JS: Yeah, and that definitely gives you some specific advantages, dealing with your competition, dealing with the kinds of projects that you’re working on. You know, for me, one of the questions that I looked at when I went through the documents is it’s clear to me that they’re really looking to expand their lines of business in a major way. This isn’t just to throw out more home loans out there. It seems like they’ve got what seem like nascent lines of business now, but could be really big deals.

EG: Yeah, you know, this is a long term play. Which of course is how Dan thinks. I mean, all of his real estate plays are long term plays. Quicken isn’t this overnight thing where, you know, three years ago, it was valued at $1 million. You know, some of the silly stuff we see. I mean, it’s been around for 30 to 35 years. And they really dominate the home loan business. They are number one. So when they’re looking at expansion they’re doing you know what I teach my students in a strategy course. You say, “wow, look, we’re number one in home loans. How do we use that to build ancillary businesses. Businesses where our strength in the home loan business, our regional home loan business, give us an advantage and and let’s build some other big businesses.” And that’s what they’re up to. Clearly they’re long term thinkers. They’re investing in the future. They’ve asked themselves the question of what happens when we have so much market share and home loans, that it’s no longer a growth rocket, what’s our next rocket? They’re clearly all over that.

SG: So thinking about this pressure to always be growing to be focused on the next quarter and the financial results and delivering returns to investors. What’s that gonna mean for, you know, the 20,000 employees at these Bedrock companies? You know, I mean, many of them, frankly, are listeners of our show,

EG: So I think they’re going to see very little change except maybe a beneficial one. Here’s why I think they’re not going to be too affected by those typical public company pressures where management makes decisions which optimize the short term so that they get to keep their job and kind of toss out the long term. And then when they hit two bad quarters in a row, the top brass save their jobs by firing everybody else and saying, “oh, look, here’s my turnaround plan. I’m firing everybody who’s not me.”

I don’t think people at Rocket or Quicken need to worry about that. Because Dan’s not worried about losing his job. The top management aren’t worried about losing their jobs. An activist investor can’t show up and rattle their cages and scare them and get them thrown out. Because Dan has control.

So, the fact that Dan has kept control and has been the guy who’s had control along means I think the employee should expect pretty much the same that they’ve seen in the past. But with one possible upside. Some of them could actually get stock options now, and be paid in stock and participate in the upside equity of the company in a way that wasn’t possible when it was private. So, you know, if I were working at Quicken, I would think, oh, this might be pretty good.

JS: Yeah, I have a thought along those lines. We talked about the employees, but what about the city in general? You know, you look at cities like Charlotte, that have been able to grow at insane paces due to the financial sector and seeing a company like Quicken or what I guess they’re officially wanting to be called now, like Rocket or Rock. Seeing this kind of move, looks like an expansion of those services and maybe even expansion of things that could be offered here in Detroit. I think for Detroit’s comeback to be sustainable we need more than just one superstar company. And how could this impact the city long term?

EG: Well, this could be great because, we haven’t been successful at attracting big businesses to come in. You know years ago, Chicago attracted Boeing’s headquarters from Seattle. We haven’t had much luck with that. So, what you have to hope is that companies like, I’m gonna keep calling it Quicken because I’ve always called it Quicken; that companies like Quicken one stay headquartered here, don’t move to Texas or anywhere else, and that they keep growing. So the fact that they have given us a peek at what their thoughts about growth are, and the fact that at least I think those thoughts make a lot of sense. I think this could be really good. I mean, if they could build over the next 10 or 20 years, a second company that is as successful as Quicken. Well, that would be pretty good for Detroit.

SG: And do you expect that some of Dan Gilbert’s side work, that is to say, some of the things that are not central to the business of Quicken Loans, all of his real estate and I think they’re still involved in some venture capital activities and things like that that those are going to be affected pro or con from this IPO?

EG: No, I think those things will continue forward. I knew Matt Cullen, who was running the real estate side, and that’s really inside Dan’s heart. He’s not going to stop doing that. And Jake Cohen and others at Detroit Venture Partners at the venture arm, they’ve built a good team. Jake is one of my former students. And Dan’s heart’s really in that too. I mean, this is the entrepreneurs’ entrepreneur. So I think we won’t see any changes there. You know you’ll worry about when a company goes through a change, like going public, will they still be able to be involved civically? Well, Dan was in control, he’s still in control.

Public companies can be as involved civically as they want to. When I was a little kid, I lived in Midland, Michigan and Dow Chemical Company was a public company, and it was very involved and good to the community. So the fact that one piece of his business, a big piece of his business has gone public, doesn’t mean we should worry about any changes on the downside.

SG: You’ve presented a very optimistic view of this whole move to going public and everything. I wonder, do you see any big risks for Bedrock?

EG: The risks when you go public is the litigation risk. When you’re a private company, you’re owned by a very small group of people, and only a few people who can get angry and you typically work it out. When you go public, any of your thousands or 10s of thousands or hundreds of thousands of shareholders can sue you. And in fact, there’s a whole group of lawyers the Plaintiffs’ Securities Bar, cruising around. And if you have a disappointing quarter, they can’t get anybody fired, but what they can do is file lawsuits claiming some kind of securities fraud. So public companies spend, even the best up and up public companies just regularly spend money swatting down these nuisance lawsuits. So you know that’s an annoyance. I don’t know that it’s really going to be a danger, but everybody will have a down quarter or two and you can be sure, somebody will convince somebody to bring a suit and sue them. So, you know, that’s just unavoidable.

JS: What I was gonna ask about one of the other companies that is in this kind of their whole, like, umbrella and family of companies, Stock X. That’s been a unicorn that’s gotten a ton of press, and a ton of traffic and a ton of attention. Do you think a successful IPO here could portend well, for other companies in this group, or does that not affect it? Or what do you think around that?

EG: Yeah, you know, it could happen. I mean, it took what 30 or 35 years to take Quicken public, but for Stock X or something else, which could be spun out as public? I think if the experience for management and for Dan is positive, if he isn’t too aggravated by now having a public company. Yeah, we could see one of the other successful growth engines also spin out as a public company.

SG: What is your sense of the kind of response this IPO is likely to trigger from Wall Street? Do you think it’ll be successful? And is it at all noteworthy that this IPO will, you know, we don’t know exactly when it’s going to happen but presumably it’s going to come during the coronavirus pandemic, which has obviously shut down huge swaths of the economy.

EG: Yeah, and you have to wonder, you know, what it’s doing for home loans. I don’t really know whether it’s affected home loans, some people might be refinancing houses. You know, to predict how an IPO will do, which I often try to do actually try to predict it and it’s really hard because there are two factors. The factors that the company controls, and then there’s the market stuff, what’s going on in the market, some other loan companies, some other insurance company with reports, bad results, and all of a sudden people are worried about you, or Coronavirus cases go up or something happens with China. So there are all these things under nobody’s control and which are unpredictable. They’re like, hazardous things falling on your head, make it tough to predict. The part where analysts will look at the company, that part is going to go very well, because this is not a speculative company.

This isn’t a company where its entire value depends on this drug that they haven’t proven does anything. It isn’t dependent on them, proving that it does cure cancer, which won’t happen for the next four or five years. And if they can’t prove that the company is worth zero. It isn’t one of these platform companies where they make more and more revenue and twice as much more losses. This is just a really solid long term profitable company. So when analysts look at it, and when the investors, you know investors at pension funds and insurance companies, big investors who buy big amounts of the stock look at it, they’re gonna say, Wow, this one looks good because there’s upside there’s growth, there’s a growth story. It’s not run by a 28-year-old egomaniac, long history, trust management, I think for whatever’s under the control of the company. It’s gonna go really well.

SG: All right, fascinating stuff. Erik Gordon is a professor at the University of Michigan Ross School of Business. Professor, thank you so much for your time today. We really appreciate it.

EG: It was my pleasure.

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