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We review 100's of IPO clients each year...
Are we looking for you?
An initial public offering (IPO) means a company is selling stock for the first time, going public for all the world to participate in its stellar growth.
Underwriters:
Every investor has heard about the first day of trading of some rocket stocks: Ebay, Ubid, Geocities, Earthweb, Verisign, Marketwatch.com, Webmethods, Avenue A, Red Hat, Avanex, Internet Capital Group, etc. The IPO’s that rise dramatically are normally sold at the pricing to a broker’s institutional investors, not to the general public, i.e. you.
Let’s consider an IPO where the underwriting syndicate can’t "give away" the stock to institutions for whatever reasons. Where do you think this stock gets offered next? That’s right you will now get a call and can have all the stock you want. The problem then becomes no or low institutional ownership which greatly increases your margin of error. We like to see institutional ownership in the 25 – 30% range.
Every IPO of any worth is underwritten by an underwriting syndicate with names like Goldman Sachs, Merrill Lynch, Morgan Stanley, Salomon Smith Barney, Paine Webber, Bear Stearns, CS First Boston and many other firms large and small. Underwriting means the syndicate is willing to pay the company going public the total dollar amount of the stock the company is issuing less the underwriting concession. If it’s a 5 million share offering, priced at $10, then the underwriter is on the hook for a $50 million dollar check, less the concession to the underwriter, usually 7% of the total.
Insider Advantage:
Ever wonder how an IPO gets priced? Or when it get priced? Why does an IPO often open up dramatically on the first day of trading? Every IPO is priced the day before it actually trades. In every underwriting firm there is an individual known as the head of the syndicate desk, that person is responsible for pricing the IPO having previously received "indications of interest" from its institutional investors and retail brokerage offices. Only one firm gets to "run the book" on any IPO and that is the syndicate manager from the lead underwriter's firm. Running the book means pricing and allocating the new stock, and that means choosing who gets how much stock.
As for the IPO’s stock price, there are several parties the syndicate manager is trying to satisfy: the company actually issuing the stock wants to maximize the dollars it receives for its stock, yet it is also important that the institutional shareholders will be happy with their investment and the underwriting firm wants a price that won’t be so high that it gets stuck with a lot of unsold shares. After the pricing meeting at the market close the day before trading, the syndicate manager now goes back to the "book" , the ledger that keeps all the buy indications from all the accounts and starts to allocate how many shares each buyer gets. If the stock is hot, many buyers won’t get enough stock or any allocation. They have to buy the stock in the open market the next day.
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