At 9:54 am -0400 on 6/16/97, vince@offshore.com.ai wrote:
> A perfectly priced IPO ends the first day with all the stock sold, but
> still trading at the offering price. If it goes from $20 to $24 (20%
> higher) then demand was too large at the $20 price, and the company should
> have charged a higher price for its stock (maybe $22), and raised more
> money (maybe 10% more).
"Should" and "is" aren't necessarily what happens in the IPO biz. Brealy
and Myers may be theoretically right in the old corporate finance textbook
(they also say there's no difference, from a financial prospective, between
equity and debt, for instance), but the market doesn't happen in a bluebook
exam.
IPOs, especially larger ones like Iridium's, are usually sold to
institutional investors in order to get the issue out the door quickly.
Unfortunately, these very institutional investors usually don't hang onto
these IPOs for long, preferring instead to "flip" the hot ones into the
market after a few days or even hours, in order to turn a quick profit. So,
typically, the investment bank underprices the IPO to make it "flippable"
as a way to "reward" the institutions for being such good customers,
especially for all the times they've bought into secondary issues of big
boring existing companies, like, say, a bond issue for Kodak or IBM or GE.
Of course, there's also the company management, who is usually more
concerned with getting the stock issued as quickly as possible, and so they
tend to think with their pants than with their heads when it comes to an
offering price. Offering disasters, like the recent Wired magazine
floatation, tend to stick out more in the minds of a company's management
than the 'macroeconomic' effect of the investment bank shortchanging their
existing shareholders on an IPO which will change the shareholder list
drastically anyway.
As a result, I bet that offerings of companies in which the management and
employees of the company are the sole shareholders are more efficiently
priced than a company whose shareholders are venture caps and institutions.
Microsoft would be a good case in point, because all the shareholders were
employees and managers, and the company was completely bootstrapped from
day one. MS only went public because their population of stock option
holders exceeded the regulatory maximum for a privately held corporation.
They had more money than they could spend at the time, and so they probably
wanted the best price possible. OTOH, the investment bank had all those
institutional customers itching to flip whatever MS shares they could get...
:-).
Cheers,
Bob Hettinga
(Former Clerical Pond Scum at Morgan Stanley & Co., Inc.)
-----------------
Robert Hettinga (rah@shipwright.com), Philodox
e$, 44 Farquhar Street, Boston, MA 02131 USA
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experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'
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