an initial public offering or initial purchase offer

7/31/2019 An Initial Public Offering or Initial Purchase Offer

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An initial public offering or initial purchase offer (IPO), referred to simply as an "offering" or"flotation", is when a company (called the issuer) issuescommon stockorsharesto the publicfor the first time. They are often issued by smaller, younger companies seekingcapitalto expand,but can also be done by largeprivately owned companieslooking to becomepublicly traded.

In an IPO the issuer obtains the assistance of anunderwritingfirm, which helps determine whattype ofsecurityto issue (common orpreferred), best offering price and time to bring it to market.

Contents

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1 History 2 Reasons for listing 3 Disadvantages of an IPO 4 Procedure 5 Auction 6 Pricing 7 Issue price 8 Quiet period 9 Stag profit 10 Largest IPOs 11 See also 12 References 13 External links 14 Further reading

[edit] History

This section requiresexpansion.

In 1602, theDutch East India Companywas the first company to issue stocks and bonds in theworld in an initial public offering.[1]

[edit] Reasons for listing

When a company lists its securities on apublic exchange, the money paid by investors for thenewly issued shares goes directly to the company (in contrast to a later trade of shares on theexchange, where the money passes between investors). An IPO, therefore, allows a company totap a wide pool of investors to provide it with capital for future growth, repayment of debt orworking capital. A company selling common shares is never required to repay the capital toinvestors.
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c_offering#Quiet_periodhttp://en.wikipedia.org/wiki/Initial_public_offering#Issue_pricehttp://en.wikipedia.org/wiki/Initial_public_offering#Pricinghttp://en.wikipedia.org/wiki/Initial_public_offering#Auctionhttp://en.wikipedia.org/wiki/Initial_public_offering#Procedurehttp://en.wikipedia.org/wiki/Initial_public_offering#Disadvantages_of_an_IPOhttp://en.wikipedia.org/wiki/Initial_public_offering#Reasons_for_listinghttp://en.wikipedia.org/wiki/Initial_public_offering#Historyhttp://en.wikipedia.org/wiki/Initial_public_offeringhttp://en.wikipedia.org/wiki/Preferred_stockhttp://en.wikipedia.org/wiki/Security_(finance)http://en.wikipedia.org/wiki/Underwritinghttp://en.wikipedia.org/wiki/Public_companyhttp://en.wikipedia.org/wiki/Privately_held_companyhttp://en.wikipedia.org/wiki/Financial_capitalhttp://en.wikipedia.org/wiki/Share_(finance)http://en.wikipedia.org/wiki/Common_stock


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Once a company is listed, it is able to issue additional common shares via a secondary offering,thereby again providing itself with capital for expansion without incurring any debt. This abilityto quickly raise large amounts of capital from the market is a key reason many companies seek togo public.

There are several benefits to being a public company, namely:

Bolstering and diversifying equity base Enabling cheaper access to capital Exposure, prestige and public image Attracting and retaining better management and employees through liquid equity

participation Facilitating acquisitions Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc. Increased liquidity for equity holder

[edit] Disadvantages of an IPO

There are several disadvantages to completing an initial public offering, namely:

Significant legal, accounting and marketing costs Ongoing requirement to disclose financial and business information Meaningful time, effort and attention required of senior management Risk that required funding will not be raised Public dissemination of information which may be useful to competitors, suppliers and

customers

[edit] Procedure

IPOs generally involve one or moreinvestment banksknown as "underwriters". The companyoffering its shares, called the "issuer", enters a contract with a lead underwriter to sell its sharesto the public. The underwriter then approaches investors with offers to sell these shares.

The sale (allocation and pricing) of shares in an IPO may take several forms. Common methodsinclude:

Best efforts contract

Firm commitment contract All-or-none contract Bought deal Dutch auction

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or moremajor investment banks (lead underwriter). Upon selling the shares, the underwriters keep acommissionbased on a percentage of the value of the shares sold (called thegross spread).
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Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO,take the highestcommissionsup to 8% in some cases.

Multinational IPOs may have many syndicates to deal with differing legal requirements in boththe issuer's domestic market and other regions. For example, an issuer based in the E.U. may be

represented by the main selling syndicate in its domestic market, Europe, in addition to separatesyndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in themain selling group is also the lead bank in the other selling groups.

Because of the wide array of legal requirements and because it is an expensive process, IPOstypically involve one or morelaw firmswith major practices insecurities law, such as theMagicCirclefirms of London and thewhite shoe firmsof New York City.

Public offerings are sold to both institutional investors and retail clients of underwriters. Alicensed securities salesperson (Registered Representativein the USA and Canada ) sellingshares of a public offering to his clients is paid a commission from their dealer rather than their

client. In cases where the salesperson is the client's advisor it is notable that the financialincentives of the advisor and client are not aligned.

In the US sales can only be made through a final prospectus cleared by the Securities andExchange Commission.

Investment dealerswill often initiate research coverage on companies so theirCorporate Financedepartments and retail divisions can attract and market new issues.

The issuer usually allows the underwriters an option to increase the size of the offering by up to15% under certain circumstance known as thegreenshoeor overallotment option.

[edit] Auction

This section does notciteanyreferences or sources. Please help improve thissection by adding citations toreliable sources. Unsourced material may bechallengedandremoved.(December 2006)

A venture capitalist namedBill Hambrechthas attempted to devise a method that can reduce theinefficient process. He devised a way to issue shares through aDutch auctionas an attempt tominimize the extreme underpricing that underwriters were nurturing. Underwriters, however,

have not taken to this strategy very well which is understandable given that auctions arethreatening large fees otherwise payable. Though not the first company to use Dutch auction,Googleis one established company that went public through the use of auction. Google's shareprice rose 17% in its first day of trading despite the auction method. Brokers close to the IPOreport that the underwriters actively discouraged institutional investors from buying to reducedemand and send the initial price down. The resulting low share price was then used to"illustrate" that auctions generally don't work.
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Perception of IPOs can be controversial. For those who view a successful IPO to be one thatraises as much money as possible, the IPO was a total failure. For those who view a successfulIPO from the kind of investors that eventually gained from the underpricing, the IPO was acomplete success. It's important to note that different sets of investors bid in auctions versus theopen marketmore institutions bid, fewer private individuals bid. Google may be a special case,

however, as many individual investors bought the stock based on long-term valuation shortlyafter it launched its IPO, driving it beyond institutional valuation.

[edit] Pricing

The underpricing of initial public offerings (IPO) has been well documented in different markets(Ibbotson, 1975; Ritter 1984; Levis, 1990; McGuinness, 1992; Drucker and Puri, 2007). Whileissuers always try to maximize their issue proceeds, the underpricing of IPOs has constituted aserious anomaly in the literature of financial economics. Many financial economists havedeveloped different models to explain the underpricing of IPOs. Some of the models explained itas a consequences of deliberate underpricing by issuers or their agents. In general, smaller issues

are observed to be underpriced more than large issues (Ritter, 1984, Ritter, 1991, Levis, 1990)

Historically, some of IPOs both globally and in the United States have been underpriced. Theeffect of "initial underpricing" an IPO is to generate additional interest in the stock when it firstbecomes publicly traded. Throughflipping, this can lead to significant gains for investors whohave been allocated shares of the IPO at the offering price. However, underpricing an IPO resultsin "money left on the table"lost capital that could have been raised for the company had thestock been offered at a higher price. One great example of all these factors at play was seen withtheglobe.comIPO which helped fuel the IPO mania of the late 90's internet era. Underwritten byBear Stearnson November 13, 1998, the stock had been priced at $9 per share, and famouslyjumped 1000% at the opening of trading all the way up to $97, before deflating and closing at

$63 after large sell offs from institutions flipping the stock. Although the company did raiseabout $30 million from the offering it is estimated that with the level of demand for the offeringand the volume of trading that took place the company might have left upwards of $200 millionon the table.

The danger of overpricing is also an important consideration. If a stock is offered to the public ata higher price than the market will pay, the underwriters may have trouble meeting theircommitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value onthe first day of trading, it may lose its marketability and hence even more of its value.

Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt

to reach an offering price that is low enough to stimulate interest in the stock, but high enough toraise an adequate amount of capital for the company. The process of determining an optimalprice usually involves theunderwriters("syndicate") arranging share purchase commitmentsfrom leading institutional investors.

On the other hand, some researchers (e.g. Geoffrey C., and C. Swift, 2009) believe that IPOs arenot being under-priced deliberately by issuers and/or underwriters, but the price-rocketingphenomena on issuance days are due to investors' over-reaction.[2]
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Some algorithms to determine underpricing:IPO Underpricing Algorithms

[edit] Issue price

A company that is planning an IPO appoints lead managers to help it decide on an appropriate

price at which the shares should be issued. There are two ways in which the price of an IPO canbe determined: either the company, with the help of its lead managers, fixes a price or the price isarrived at through the process ofbook building.

Note: Not all IPOs are eligible for delivery settlement through theDTC system, which wouldthen either require the physical delivery of thestock certificatesto the clearing agent bank'scustodian, or adelivery versus payment(DVP) arrangement with the selling group brokeragefirm.

[edit] Quiet period

Main article:Quiet period

There are two time windows commonly referred to as "quiet periods" during an IPO's history.The first and the one linked above is the period of time following the filing of the company'sS-1but before SEC staff declare the registration statement effective. During this time, issuers,company insiders, analysts, and other parties are legally restricted in their ability to discuss orpromote the upcoming IPO.[3]

The other "quiet period" refers to a period of 40 calendar days following an IPO's first day ofpublic trading. During this time, insiders and any underwriters involved in the IPO are restricted

from issuing any earnings forecasts or research reports for the company. Regulatory changesenacted by theSECas part of theGlobal Settlementenlarged the "quiet period" from 25 days to40 days on July 9, 2002. When the quiet period is over, generally the underwriters will initiateresearch coverage on the firm. Additionally, the NASD and NYSE have approved a rulemandating a 10-day quiet period after aSecondary Offeringand a 15-day quiet period bothbefore and after expiration of a "lock-up agreement" for a securities offering.

[edit] Stag profit

Stag profit is a stock market term used to describe a situation before and immediately after acompany's Initial public offering (or any new issue of shares). A stag is a party or individual

who subscribes to the new issue expecting the price of the stock to rise immediately upon thestart of trading. Thus, stagprofitis the financial gain accumulated by the party or individualresulting from the value of the shares rising.

For example, one might expect a certainI.T.company to do particularly well and purchase alarge volume of their stock or shares before flotation on the stock market. Once the price of theshares has risen to a satisfactory level the person will choose to sell their shares and make a stagprofit.
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[edit] Largest IPOs

General Motors$23.1B in 2010 Agricultural Bank of China$22.1B in 2010[4] Industrial and Commercial Bank of China$21.9B in 2006[5] American International Assurance$20.5B in 2010[6] NTT DoCoMo$18.4B in 1998[7] Visa Inc.$17.9B in 2008 AT&T Wireless$10.6B in 2000 Rosneft$10.4B in 2006 Santander Brasil$8.9B in 2009

Why does a company go for an IPO?

An IPO stands for Initial Public Offering. It is the process in which a large company issues

shares to the general public for the first time to raise cash and capital for its expansion and

business usage.

Answer There are two basic ways to raise money for something like an expansion: selling part of the

equity of the company through a stock sale, and creating debt by selling bonds.

There are advantages and disadvantages to both. In the case of selling equity, the majordisadvantage is the loss of some of your autonomy. Investors hate to lose money, and want tomake sure you're doing what it takes to make money. The upside is once you've sold the

stock, you don't necessarily have any further expenditures. A lot of companies, especiallyhigh-tech ones, don't pay dividends. Also, dividends are paid out of after-tax profits.

If you sell bonds, you must pay interest on time or risk default. The tradeoff here is there'snot much loss of autonomy, and bond interest payments come out of pre-tax income.

Relevant answers: Why do corporation go for an IPO?

A corporation would go for an IPO to raise money. This money can be used for anything like: BusinessExpansion Acquisition of smaller companies Payout of debt/loans etc In most cases IPO's are taken...

Which companies can issue an IPO?

Not all company's can issue shares to the public. SEBI has provided a list of requirements that need tobe met by a company if they wish to go public. A company that wishes to go public needs to meet...

What do you do when you have to go to the free company?go to the toisleet

How does a company present an IPO?Steps in an IPO Process: This is how an initial public offering process is initiated and reaches itsconclusion. The entire process is regulated by the 'Securities and Exchange Board of India...
http://en.wikipedia.org/w/index.php?title=Initial_public_offering&action=edit&section=10http://en.wikipedia.org/w/index.php?title=Initial_public_offering&action=edit&section=10http://en.wikipedia.org/wiki/General_Motorshttp://en.wikipedia.org/wiki/General_Motorshttp://en.wikipedia.org/wiki/Agricultural_Bank_of_Chinahttp://en.wikipedia.org/wiki/Agricultural_Bank_of_Chinahttp://en.wikipedia.org/wiki/Initial_public_offering#cite_note-3http://en.wikipedia.org/wiki/Initial_public_offering#cite_note-3http://en.wikipedia.org/wiki/Initial_public_offering#cite_note-3http://en.wikipedia.org/wiki/Industrial_and_Commercial_Bank_of_Chinahttp://en.wikipedia.org/wiki/Industrial_and_Commercial_Bank_of_Chinahttp://en.wikipedia.org/wiki/Initial_public_offering#cite_note-4http://en.wikipedia.org/wiki/Initial_public_offering#cite_note-4http://en.wikipedia.org/wiki/Initial_public_offering#cite_note-4http://en.wikipedia.org/wiki/American_International_Assurancehttp://en.wikipedia.org/wiki/American_International_Assurancehttp://en.wikipedia.org/wiki/Initial_public_offering#cite_note-5http://en.wikipedia.org/wiki/Initial_public_offering#cite_note-5http://en.wikipedia.org/wiki/Initial_public_offering#cite_note-5http://en.wikipedia.org/wiki/NTT_DoCoMohttp://en.wikipedia.org/wiki/NTT_DoCoMohttp://en.wikipedia.org/wiki/Initial_public_offering#cite_note-6http://en.wikipedia.org/wiki/Initial_public_offering#cite_note-6http://en.wikipedia.org/wiki/Initial_public_offering#cite_note-6http://en.wikipedia.org/wiki/Visa_Inc.http://en.wikipedia.org/wiki/Visa_Inc.http://en.wikipedia.org/wiki/AT%26T_Wireless_Serviceshttp://en.wikipedia.org/wiki/AT%26T_Wireless_Serviceshttp://en.wikipedia.org/wiki/Rosnefthttp://en.wikipedia.org/wiki/Rosnefthttp://en.wikipedia.org/wiki/Banco_Santander_Brasilhttp://en.wikipedia.org/wiki/Banco_Santander_Brasilhttp://wiki.answers.com/Q/Why_do_corporation_go_for_an_IPOhttp://wiki.answers.com/Q/Why_do_corporation_go_for_an_IPOhttp://wiki.answers.com/Q/Why_do_corporation_go_for_an_IPOhttp://wiki.answers.com/Q/Why_do_corporation_go_for_an_IPOhttp://wiki.answers.com/Q/Why_do_corporation_go_for_an_IPOhttp://wiki.answers.com/Q/Which_companies_can_issue_an_IPOhttp://wiki.answers.com/Q/Which_companies_can_issue_an_IPOhttp://wiki.answers.com/Q/Which_companies_can_issue_an_IPOhttp://wiki.answers.com/Q/Which_companies_can_issue_an_IPOhttp://wiki.answers.com/Q/Which_companies_can_issue_an_IPOhttp://wiki.answers.com/Q/What_do_you_do_when_you_have_to_go_to_the_free_companyhttp://wiki.answers.com/Q/What_do_you_do_when_you_have_to_go_to_the_free_companyhttp://wiki.answers.com/Q/What_do_you_do_when_you_have_to_go_to_the_free_companyhttp://wiki.answers.com/Q/What_do_you_do_when_you_have_to_go_to_the_free_companyhttp://wiki.answers.com/Q/What_do_you_do_when_you_have_to_go_to_the_free_companyhttp://wiki.answers.com/Q/How_does_a_company_present_an_IPOhttp://wiki.answers.com/Q/How_does_a_company_present_an_IPOhttp://wiki.answers.com/Q/How_does_a_company_present_an_IPOhttp://wiki.answers.com/Q/How_does_a_company_present_an_IPOhttp://wiki.answers.com/Q/How_does_a_company_present_an_IPOhttp://wiki.answers.com/Q/How_does_a_company_present_an_IPOhttp://wiki.answers.com/Q/What_do_you_do_when_you_have_to_go_to_the_free_companyhttp://wiki.answers.com/Q/Which_companies_can_issue_an_IPOhttp://wiki.answers.com/Q/Why_do_corporation_go_for_an_IPOhttp://en.wikipedia.org/wiki/Banco_Santander_Brasilhttp://en.wikipedia.org/wiki/Rosnefthttp://en.wikipedia.org/wiki/AT%26T_Wireless_Serviceshttp://en.wikipedia.org/wiki/Visa_Inc.http://en.wikipedia.org/wiki/Initial_public_offering#cite_note-6http://en.wikipedia.org/wiki/NTT_DoCoMohttp://en.wikipedia.org/wiki/Initial_public_offering#cite_note-5http://en.wikipedia.org/wiki/American_International_Assurancehttp://en.wikipedia.org/wiki/Initial_public_offering#cite_note-4http://en.wikipedia.org/wiki/Industrial_and_Commercial_Bank_of_Chinahttp://en.wikipedia.org/wiki/Initial_public_offering#cite_note-3http://en.wikipedia.org/wiki/Agricultural_Bank_of_Chinahttp://en.wikipedia.org/wiki/General_Motorshttp://en.wikipedia.org/w/index.php?title=Initial_public_offering&action=edit&section=10


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Why company issue IPOs?Generally, a company has an Initial Public Offering in order to raise a good deal of money in order toexpand/grow the business. In the IPO prospectus, the company will summarize exactly how they...

An initialpublicoffering IPO is when a company does what?IPO is when a company issues its shares to the public for the first time.

Can privatecompaniesissue his shares to public?Not without becoming a public company. And that requires registration with FTC and meeting manyrequirements.

Is Sony a private or a publiccompany?Sony is a Ltd company, it's public

What is the purpose ofinitialpublicoffering?The purpose of an Initial Public Offering is to offer shares of a company to the public for the very firsttime. An initial pricei is set for the share and then investors from across the country can...

What is the purpose of an initialpublicoffering?An initial public offering (IPO) is a way to raise money by changing a company from a privately heldone to a corporation, by selling shares of stock. The first shares sold are often more valuable...

Why IPO?

Many entrepreneurs have the dream of taking their companies from a start-up to one that is verysuccessful and growing significantly. Part of that dream typically involves the companybecoming public with its shares traded on a recognized stock exchange.

Why do entrepreneurs have this dream of taking their companies public?

The public markets allow companies to raise an important amount of capital that may not

otherwise be available to small privately funded companies. We have seen and read stories overthe years of companies struggling to raise capital in the private markets. A number of executiveshave developed good strategies for their companies. However, they often have limited financialresources to execute on their strategies as existing and new shareholders are unwilling or unableto provide additional funding. The public markets may eliminate part of this risk, therebyallowing the company to grow to the next level.

Many entrepreneurs take their companies public as a mechanism to allow their initialshareholders (friends, family, venture capitalists, etc.) to achieve some liquidity on their originalinvestments. Most investors in start-up companies make their investments expecting that one daythese companies will have their shares traded on the public markets, thereby allowing them to

dispose of their shares and reap the benefits of their initial investment.

Another benefit to being a public company is the increased credibility that the company mayhave in the eyes of its customers, suppliers, partners, employees and the community at large.Public companies tend to have more visibility within business circles than private companies, asmany people perceive being publicly traded is one of the criteria to being a successful company.
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The compensation of employees through a stock option program is generally more valuable in apublic company setting than that of a private company, as employees have an opportunity ofassessing the value of those options through the movements of the stock price. Over the lastdecade, many employees in private companies have questioned the value of stock optionprograms, particularly as companies have struggled to close their next round of financing. Stock

option programs of public companies could therefore be seen as a competitive advantage forattracting and recruiting new employees.

Public companies whose strategies include growing through mergers and acquisitions have asignificant advantage in using their shares as a currency for the transaction when compared toprivate companies.Once a company has become a successful public entity, it can go back to the markets foradditional funding through the issuance of new shares to allow even further expansion. Manyfactors will influence the companys ability to return to the markets for additional financing suchas, its success in delivering on its strategy and expectations, the receptivity of stock markets tofinancings in general and the appetite of investors for the shares of the company. With the

challenging markets of the last couple of years, we have seen periods during which very fewofferings were brought to market, as investors had little interest in increasing their exposure tothe equity markets.

Why IPO drought is great for investors

Companies prefer to go public when the appetite for new stocks is strong, but is IPO activity agood contrarian indicator?

According tothis chartfrom Bespoke Investment Group, which shows initial public offeringactivity among U.S. companies going back to 1990, there appears to be a clear correlationbetween the number of IPOs each month and the performance of the S&P 500. No wonder: If themarket is purring, investors are interested in new stocks. And if investors are interested in newstocks, companies can raise more money.

But for investors who love patterns, theres a pretty clear one here: A dive in IPO activity cansignal capitulation among investors. That is, when the stock market is weak, investors wonttouch an IPO, and therefore companies ice their plans to go public. The number of IPOs shrankclose to zero during the darkest days of the financial crisis, in late 2008 and early 2009. Lookingback, that was an excellent time to wade back into the stock market as an investor.

Right now, IPO activity is in some sort of grey zone: It has picked up tremendously with thestock markets recovery in early 2009, but it is nowhere near the peaks seen in the 1990s or evenearlier this decade for that matter. According to Bespoke, IPO activity has averaged about 13.75per month this year, down from an average of 25 between 2004 and 2007. In the late 1990s,driven by insatiable demand for dot-com stocks, the number of IPOs per month regularly roseabove 80.
http://www.bespokeinvest.com/thinkbig/2010/9/28/of-ipos-by-month.htmlhttp://www.bespokeinvest.com/thinkbig/2010/9/28/of-ipos-by-month.htmlhttp://www.bespokeinvest.com/thinkbig/2010/9/28/of-ipos-by-month.htmlhttp://www.bespokeinvest.com/thinkbig/2010/9/28/of-ipos-by-month.html


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In other words, this IPO-indicator looks like a lot of other indicators out there. Things are betterthan they once were, but theyre still not great

May 27, 2011, 10:48 amI.P.O./Offerings|Deal Professor

Why I.P.O.s Get Underpriced

BySTEVEN M. DAVIDOFF

Michael Nagle/Bloomberg NewsApplauding at the start of LinkedIns

first day of trading.

The debate over the pricing of initial public offerings has been vigorous.

In his op-ed column in The New York Times,Joe Nocera wrote on Saturdaythat LinkedIn wasscammed by its bankers, who underwrote LinkedIns initial public offering. The evidence: themoney LinkedIn lost by underpricing its I.P.O.

On MondayAndrew Ross Sorkin disagreed on DealBook, offering several reasons why LinkedInmay have benefited from such underpricing and inviting a dialogue on the issue.

Whos right?

Luckily for all of us, there are academics who have devoted their entire careers to studying I.P.O.underpricing. That is, why do companies repeatedly go public at a price significantly lower thanthe first-day closing price? In LinkedIns case, the underpricing was more than 100 percent, theamount LinkedIns shares rose on the first day of trading.

Academics have found that I.P.O. underpricing is ubiquitous.Jay Ritter has documentedunderpricingover the years.According to Professor Ritter, the average underpricing for I.P.O.sin the United States was 14.8 percent from 1990 to 1998, 51.4 percent from 1999 to 2000 and12.1percent from 2001 to 2009.
http://dealbook.nytimes.com/category/main-topics/ipoofferings/http://dealbook.nytimes.com/category/main-topics/ipoofferings/http://dealbook.nytimes.com/category/main-topics/ipoofferings/http://dealbook.nytimes.com/category/columnists/deal-professor/http://dealbook.nytimes.com/category/columnists/deal-professor/http://dealbook.nytimes.com/category/columnists/deal-professor/http://dealbook.nytimes.com/author/steven-m-davidoff/http://dealbook.nytimes.com/author/steven-m-davidoff/http://dealbook.nytimes.com/author/steven-m-davidoff/http://www.nytimes.com/2011/05/21/opinion/21nocera.htmlhttp://www.nytimes.com/2011/05/21/opinion/21nocera.htmlhttp://www.nytimes.com/2011/05/21/opinion/21nocera.htmlhttp://dealbook.nytimes.com/2011/05/23/why-linkedins-price-was-appropriate/http://dealbook.nytimes.com/2011/05/23/why-linkedins-price-was-appropriate/http://dealbook.nytimes.com/2011/05/23/why-linkedins-price-was-appropriate/http://bear.cba.ufl.edu/ritter/ipodata.htmhttp://bear.cba.ufl.edu/ritter/ipodata.htmhttp://bear.cba.ufl.edu/ritter/ipodata.htmhttp://bear.cba.ufl.edu/ritter/ipodata.htmhttp://bear.warrington.ufl.edu/ritter/Moneybyyear19902009.pdfhttp://bear.warrington.ufl.edu/ritter/Moneybyyear19902009.pdfhttp://bear.warrington.ufl.edu/ritter/Moneybyyear19902009.pdfhttp://bear.warrington.ufl.edu/ritter/Moneybyyear19902009.pdfhttp://bear.cba.ufl.edu/ritter/ipodata.htmhttp://bear.cba.ufl.edu/ritter/ipodata.htmhttp://dealbook.nytimes.com/2011/05/23/why-linkedins-price-was-appropriate/http://www.nytimes.com/2011/05/21/opinion/21nocera.htmlhttp://dealbook.nytimes.com/author/steven-m-davidoff/http://dealbook.nytimes.com/category/columnists/deal-professor/http://dealbook.nytimes.com/category/main-topics/ipoofferings/


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Over the last 50 years, I.P.O.s in the United States have been underpriced by 16.8 percent on

average. This translates to more than $125 billion that companies have left on the table in the last20 years.

I.P.O. pricing is also a worldwide phenomenon. In China, the underpricing has been severe,averaging 137.4 percent from 1990 to 2010. This compares with 16.3 percent in Britain from1959 to 2009. In most other countries, I.P.O. underpricing averages above 20 percent.

What explains this widespread phenomenon? There are a number of overlapping andnonexclusive theories:

Information Asymmetry

The most prominent explanation and the one with the most empirical support is that I.P.O.underpricing occurs because of informational asymmetry.

The information asymmetry theory assumes that the I.P.O. pricing is a product of informationdisparities.
http://dealbook.nytimes.com/category/columnists/deal-professor/http://dealbook.nytimes.com/category/columnists/deal-professor/http://dealbook.nytimes.com/2011/05/27/why-i-p-o-s-get-underpriced/?pagemode=printhttp://dealbook.nytimes.com/2011/05/27/why-i-p-o-s-get-underpriced/?pagemode=printhttp://blogpostshare%28%27linkedin%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27linkedin%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27digg%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27digg%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27facebook%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27facebook%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27mixx%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27mixx%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27myspace%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27myspace%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27permalink%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27permalink%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://community.nytimes.com/comments/dealbook.nytimes.com/2011/05/27/why-i-p-o-s-get-underpriced/http://community.nytimes.com/comments/dealbook.nytimes.com/2011/05/27/why-i-p-o-s-get-underpriced/http://community.nytimes.com/comments/dealbook.nytimes.com/2011/05/27/why-i-p-o-s-get-underpriced/http://blogpostshare%28%27permalink%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27myspace%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27mixx%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27facebook%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27digg%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://blogpostshare%28%27linkedin%27%2C%20%27linkedin%2Cpricing%2Cunderwriters%2Cdeal%20professor%2Cfinancial%20services%2Ci.p.o./Offerings',%20'May%2027,%202011',%20'401417');http://dealbook.nytimes.com/2011/05/27/why-i-p-o-s-get-underpriced/?pagemode=printhttp://dealbook.nytimes.com/category/columnists/deal-professor/


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This theory takes a variety of forms, but the most influential one was put forth by Kevin Rockalmost a quarter-century ago. He theorized that uninformed investors bid without regard to thequality of the I.P.O. Informed investors bid only on the offerings they think will gain superiorreturns. But with weak I.P.O.s only uninformed investors will bid and lose money. The lossesare so great that the uninformed investors will eventually leave the I.P.O. market.

If you were an economics major, you might recognize this problem as a lemon theory named afterGeorge Akerlofs famous paper on how used cars are pricedwhen information isuncertain.

The underwriters, however, need the uninformed investors to bid since informed investors do notexist in sufficient number. To solve this problem, the underwriter reprices the I.P.O. to bring inthese investors and ensure that uninformed investors bid. The consequence is underpricing.

This theory has found empirical support in papers that have found that when investment bankscan allocate shares in greater measure to informed investors, the underpricing is reduced since

the compensation needed to draw uninformed investors is lower.

Underpricing has also been found to be lower when information about the issuer is more freelyavailable so that uninformed investors are at less of a disadvantage.

Another informational-based theory for I.P.O. underpricing is known as informational revelation.This theory centers on the book-building process, the mechanism by which an underwriter buildsa book of potential investors and the prices and number of shares they are willing to purchase.

The book-building process is intended for the underwriter to assess demand and obtaininformation from potential buyers about what price buyers are willing to pay. In order to

incentivize investors to disclose sufficient information about the price they believe isappropriate, underwriters allocate fewer shares to potential purchasers who bid low.

But underwriters still discount the stock to incentivize aggressive bidding and to ensure that thebids are not even lower since the more bids there are, the more information is revealed about theappropriate price for the stock. Issuers accept this underpricing because it allows underwriters tobetter gauge a higher sale price. This theory too has found empirical support in the academicliterature.

A third strand of the informational asymmetry theory asserts that underpricing is associated withthe weakness of the issuer. The underpricing is intended to compensate the purchasers for this

weakness. This theory has found weak evidential support.

Investment Banking Conflicts

The investment bank conflict theory, the one Mr. Nocera supports, posits that investment banksarrange for underpricing as a way to benefit themselves and their other clients. There is somemixed evidence to support this argument.
http://hydrogen.its.ucdavis.edu/eec/education/EEC-classes/eeclimate/class-readings/akerlof-the%20market%20for%20lemons.pdfhttp://hydrogen.its.ucdavis.edu/eec/education/EEC-classes/eeclimate/class-readings/akerlof-the%20market%20for%20lemons.pdfhttp://hydrogen.its.ucdavis.edu/eec/education/EEC-classes/eeclimate/class-readings/akerlof-the%20market%20for%20lemons.pdfhttp://hydrogen.its.ucdavis.edu/eec/education/EEC-classes/eeclimate/class-readings/akerlof-the%20market%20for%20lemons.pdf


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A number of papers have found that investment banks do respond to appropriate incentives toreduce underpricing. Higher I.P.O. commissions have been found to reduce underpricing. Atleast one paper has found that underpricing is reduced by more than 40 percent when anAmerican bank and American investors are involved. This is attributable to the higherunderwriting fees that American investment banks charge.

In addition, the greater the underwriters stake in the I.P.O. through ownership of the offeredshares, the less underpricing, though there is conflicting evidence on this point. Papers have alsofound that underwriters who incorrectly underprice their business do lose the chance for futureI.P.O.s.

Managerial Conflicts

The managerial conflict theory posits that management is the primary cause of the underpricing.In its principal form, the manager conflict theory postulates that management creates excessivedemand for I.P.O. shares in order to ensure that management can sell their holdings after a

contractual 180-day lockup for a higher price.

Alternatively, management allows underpricing to ensure that there are many purchasers of theshares. This means there are no large shareholders created by the I.P.O., shareholders who maybe more incentivized to replace management. There is not much evidence to support either formof this theory.

Litigiousness and Regulation

This theory posits that the underpricing is because of American securities laws that impose strictliability on the issuer and underwriter for material misstatements and omissions made in

connection with the I.P.O. The underwriter deliberately underprices the I.P.O. to ensure that evenif there is such a misstatement or omission the purchasers do not have a claim since these failuresare priced in the I.P.O. This theory has not found much support primarily because regulatoryschemes in other countries are much laxer yet I.P.O. underpricing happens there as well.

Behavioral Explanations

These theories have gained attention in the wake of the technology bubble. One form of thistheory posits that either institutional investors or managers gain from taking advantage of retailshareholders who act irrationally or otherwise against their economic interests. And that bothinstitutional shareholders and managers therefore underprice I.P.O.s to lock in these gains. A

variation of this theory posits that it is the institution that allows this underpricing as a result ofits own inability to recognize the loss. There is uncertain evidence for these behavioral theories,but they do help in explaining extreme rises like LinkedIns.

And these are but a few of the competing theories for I.P.O. underpricing. They may explainI.P.O. underpricing of 10 percent to 20 percent, but they dont explain the extreme underpricingof a debut like LinkedIns.


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Mr. Sorkin discusses some reasons why this may be appropriate, including a need to show asuccessful I.P.O. rather than a price drop and the fact that LinkedIn may gain by selling its shareslater at a higher price.

These may be the reasons, or perhaps Mr. Nocera is right. But I have my own theory that

overlaps a bit with Mr. Sorkins.

If LinkedIn had sold the same number of shares as it did last week at about $100 per share, itwould have made an extra $200 million or so. But this assumes that there were enough investorswilling to buy shares at that level. LinkedIn and the other shareholders sold less than 10 percentof the firms outstanding shares. A sale at $100 a share would have reduced demand andcertainly wouldnt have given the company the publicity it did.

Now, LinkedIn can wait and sell shares later at this higher price, gaining more money in theaggregate.

The company, meanwhile, received national publicity for its Web site, something that may beworth the tens of millions of dollars alone, if not mor

Why IPO ratings should be welcomed: When the Securities and Exchange Board of India (Sebi) decided to scrap discretionary allotment for qualified

institutional buyers (QIBs) and switch to the more transparent proportionate allotment system, it became the first

regulator to stand up to the powerful investment banking community anywhere in the world. Once the decision was

taken, it was evident that the exaggerated outrage and predictions that large institutional investors would shun IPOs

were completely baseless.

That decision recognised the specific needs of the Indian capital market and was the result of pressure from investorgroups. The path to mandatory grading of IPOs has been rocky, with enormous opposition from companies,investment bankers, fund managers, market experts and Sebi board members. We learn that the final decision cameabout in the face of strong opposition by certain board members (apparently not full-time) and that too only, with atwist in the tail, which dilutes the original...

A Historical Perspective On Why IPO Underpricing Persists

Abstracted from:IPO Underpricing Over The Very Long RunBy: Prof. David Chambers and Prof. Elroy Dimson Judge Business School, CambridgeUniversity (DC); London Business School (ED)


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Journal of Finance - Vol. 64, No. 3, Pgs. 1407-1443

Underpricing in the long-term perspective.Understanding the forces that have driven the IPO marketsince World War I can help financial executives navigate the treacherous, unpredictable marketenvironment they face today. In an expansive study of British IPOs between 1917 and 2007, financeprofessors David Chambers and Elroy Dimson show that the level of IPO underpricing has fluctuated

dramatically over the decades, responding to regulatory forces as well as the nature and interests of IPOmarket participants. The study covers three periods: 1917 to 1945; the post-WWII period of 1946 to 1986;and the Big Bang era of 1987 to 2007. Given the evolution of regulatory and market practices, the authorsexpected to find that underpricing had decreased over time, but it did not. In the earliest period,underpricing averaged 3.80%; it rose to 9.15% during the post-war time frame; and in the 21 yearsbetween 1986 and 2007, it catapulted to 19% for all British IPOs.

Banks step in.Weak investor protection and listing requirements dominated for years after World War I.Until 1929, 30% of IPOs did not have an underwriter. Instead, the role typically was filled by self-servingcompany directors, stock brokers, company promoters, or a breed of industrial trust. Merchant bankswere reluctant to step in until after the establishment of the Issuing Houses Association in 1945, whichrepresented the regulatory interests of new issue underwriters. Subsequently, investment banksunderwrote virtually all IPOs. The introduction of reputable investment banks in the IPO marketplace after

1945, along with more stringent disclosure rules that increased transparency, should logically have led todecreased levels of underpricing. In fact, underpricing increased after World War II and intensified after1986.

Wary investors led to underpricing.The authors cite a number of factors to explain this phenomenon.In the early part of the 20th century, issuers often tapped local issuing houses and investors situatedaround the Provincial Stock Exchanges to participate in an initial public offering. Trust cultivated by ties tothe local community might explain why underpricing for these issues was low, compared to IPOs sellingon the London Stock Exchange. The larger, more centralized market that arose after WWII drew morecautious, less trusting market participants, who sought assurance through underpricing.

Mistrust prevailed.The prestigious banks that dominated the IPO market after WWII also exertedmarket power. Before then, half the IPOs were issued on a partially paid basis, which left more money on

the table than a fully paid issue. The disappearance of partially paid deals after 1945 suggests thatprestigious banks used their influence to promote issuing methods hospitable to underpricing, rather thanthose that would benefit the issuers or selling shareholders. The rising threat of hostile takeovers mayalso have prompted nonselling managers to use underpricing as a way to retain control while making theirstock attractive to a wider shareholder base. The rise in institutional ownership and the "winner's curse"problem supported the underpricing trend. The influence of pension funds and insurance companiesbecame more pronounced, the authors indicate, as their share of equity ownership rose from 1.8% in1919 to nearly 50% by 1987. Taken together, these factors suggest that improvements in investorprotections, accounting standards, and regulations were not enough to overcome investors' mistrust.

Greater Transparency Reduces IPO Underpricing

Abstracted from:The Pricing Of IPOs Post-Sarbanes-OxleyBy: Prof. Jarrod Johnston and Prof. Jeff Madura Appalachian State University (JJ); FloridaAtlantic University (JM)

Financial Review - Vol. 44, No. 2, Pgs. 291-310

Overlooked advantage of Sarbanes-Oxley.Most discussions of the Sarbanes-Oxley Act over the lastseven years have focused on the statute's requirements for more comprehensive internal controls and thehigh costs and time commitments associated with its reporting requirements. Yet one potentially positive


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side to these increased controls is overlooked by companies preparing to go public. Because Sarbanes-Oxley improves transparency, finance professors Jarrod Johnston and Jeff Madura considered whetherthe Act diminishes IPO underpricing. According to some studies, underpricing occurs because an issuerwants to attract investors, provide a cushion against legal liability, and reward investment banks foranalyst coverage. Other researchers theorize that underpricing occurs when investors lack informationknown to the company's managers and that the level of underpricing increases with investors' uncertaintyand information gap. Factors such as underwriters' prestige, company size, or the presence of venturecapital backing may also affect levels of underpricing. Since Sarbanes-Oxley weeds out noncompliantissuers and reduces the level of uncertainty through greater controls and transparency, the authorssurmise that it should also reduce underpricing levels.

Transparency calms anxiety.Theoretically, issuers complying with Sarbanes-Oxley would leave lessmoney on the table in an initial public offering, and, by reducing underpricing, the statute would also affectan IPO's aftermarket performance. If prices are not engineered to produce higher returns from the outsetand if investors have clearer expectations, Sarbanes-Oxley presumably would prevent substantialaftermarket corrections. To test this hypothesis, the authors measured initial and aftermarket returnsbefore and after the law was enacted in 2002. Even after adjusting for other factors that might influencepricing, the IPOs launched before Sarbanes-Oxley showed mean initial returns of 25.5% on the first dayof trading, while the post-2002 group had 10.6% returns. After removing the 1999-2000 bubble years, thedifference was smaller but still significant. One year later, the pre-Sarbanes issuers saw a mean abnormalreturn of -8.5%, compared to 5.1% for the post-Sarbanes IPOs. (Such differences did not surface amongCanadian companies, which do not operate under Sarbanes-Oxley requirements.) The results suggestthat by providing investors with more information and transparency than they would otherwise have,Sarbanes-Oxley reduces investors' uncertainty and allows firms to leave less IPO money on the table.

Analysts' Downgrades And Upgrades Sway IPO Performance

Abstracted from:Investors Adjust Expectations Around Sell-Side Analyst Revisions In IPORecommendationsBy: Deepika Bagchee

Journal of Financial Research - Vol. 32, No. 1, Pgs. 53-70

Investors in the dark.During the first three years after an IPO, investors rely more heavily on analystsfor information than in later years. Deepika Bagchee believes that early investors seek out every availableanalyst report and tidbit of news (which often occur together, though both influence stock priceindependent of one another) and respond more strongly to these shreds of information than investors inolder companies. For companies that are going public or that have within the previous three years,investors have less information available to evaluate their track records and future prospects than forcompanies that have been public for more than three years. Both analysts and investors tend to be veryenthusiastic about an IPO, and very early investors are the most optimistic members of the pool ofpotential investors. As information becomes available, sentiment about the stock tends to decline. Thus,after the enthusiastic frenzy of the first three months, the average IPO underperforms for several yearsafter the offering and thereafter trades like other public companies of the same type.

Analyst's status magnifies investors' response.Investors expect analysts who are affiliated with theIPO underwriter to be exceptionally optimistic, the author suggests, but also expect them to haveinformation not generally available. Analysts associated with an IPO carry particular weight with investors,for both downgrades and upgrades, but their downgrades are particularly toxic. When an affiliated analystissues a downgrade, investors conclude that the situation is worse than has been revealed. Ratings byanalysts from reputable firms with big followings also generate bigger market responses. If more than oneanalyst issues a revised rating in the same direction, investors respond more strongly.


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Downgrades have greater impact than upgrades.Looking at abnormal returns in the days following adowngrade, the author finds an average abnormal return of -1.5% (or 15.07% of the three-yearunderperformance) over the entire period. Many stocks face multiple revisions in analysts' ratings, whichaugments the impact. On average, analysts' reports account for 48.62% of the three-yearunderperformance of IPOs. The effect of downgrades is strongest in the four- to six-month period (-6.3%)and gradually decreases over time to 2% in the 31- to 36-month period. During the first three months,apparently any news is good news, since investors ignore downgrades and bad press. (Downgradesactually trigger a price increase of 2%, or about 80% of the boost generated by upgrades in the first threemonths.) The fourth month begins a highly negative reaction to downgrades (and a rather mutedresponse to upgrades). Perhaps, the author theorizes, the price buoyancy in the first three months is theresult of lockup periods that prevent certain investors from selling. As lockups and selling constraintsexpire, pent-up desire to sell, particularly on bad news, is released. Older company stocks also rise onupgrades and sink on downgrades, but the magnitude of the response is smaller.

IPO Basics: What Is An IPO?

Selling Stock

An initial public offering, or IPO, is the first sale of stock by a company to the public. A company can raise money by

issuing eitherdebtorequity. If the company has never issued equity to the public, it's known as an IPO.

Companies fall into two broad categories:privateandpublic.

A privately held company has fewershareholdersand its owners don't have to disclose much information about the

company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and

follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be

private too. Did you know that IKEA, Domino's Pizza and Hallmark Cards are all privately held?

It usually isn't possible to buy shares in a private company. You can approach the owners about investing, but they're

not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to

the public and trade on astock exchange. This is why doing an IPO is also referred to as "going public."

Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a

board of directorsand they must report financial information every quarter. In the United States, public companies

report to theSecurities and Exchange Commission(SEC). In other countries, public companies are overseen by

governing bodies similar to the SEC. From an investor's standpoint, the most exciting thing about a public company is
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that the stock is traded in the open market, like any other commodity. If you have the cash, you can invest. The CEO

could hate your guts, but there's nothing he or she could do to stop you from buying stock.

Why Go Public?

Going public raises cash, and usually a lot of it. Being publicly traded also opens many financial doors:

Because of the increased scrutiny, public companies can usually get better rates when they issue debt.

As long as there is market demand, a public company can always issue more stock. Thus,mergers andacquisitionsare easier to do because stock can be issued as part of the deal.

Trading in the open markets meansliquidity. This makes it possible to implement things likeemployee stock

ownership plans,which help to attract top talent.

Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies withstrong fundamentals could qualify for an IPO and it wasn't easy to get listed.

The internet boom changed all this. Firms no longer needed strong financials and a solid history to go public. Instead,IPOs were done by smaller startups seeking to expand their businesses. There's nothing wrong with wanting toexpand, but most of these firms had never made a profit and didn't plan on being profitable any time soon. Foundedonventure capitalfunding, they spent like Texans trying to generate enough excitement to make it to the market

beforeburning throughall their cash. In cases like this, companies might be suspected of doing an IPO just to makethe founders rich. This is known as anexit strategy, implying that there's no desire to stick around and create valuefor shareholders. The IPO then becomes the end of the road rather than the beginning.

How can this happen? Remember: an IPO is just selling stock. It's all about the sales job. If you can convince peopleto buy stock in your company, you can raise a lot of money.

Next: IPO Basics: Getting In On An IPO

Table of Contents

1)IPO Basics: Introduction

2)IPO Basics: What Is An IPO?

3)IPO Basics: Getting In On An IPO

4)IPO Basics: Don't Just Jump In

5)IPO Basics: Tracking Stocks

6)IPO Basics: Conclusion

Read more:http://www.investopedia.com/university/ipo/ipo.asp#ixzz1X6RqE0Bv

No History

It's hard enough to analyze the stock of an established company. An IPO company is even trickier to

analyze since there won't be a lot of historical information. Your main source of data is the red herring, so

make sure you examine this document carefully. Look for the usual information, but also pay special
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attention to the management team and how they plan to use the funds generated from the IPO.

And what about the underwriters? Successful IPOs are typically supported by bigger brokerages that

have the ability to promote a new issue well. Be more wary of smaller investment banks because they

may be willing to underwrite any company.

The Lock-Up Period

If you look at the charts following many IPOs, you'll notice that after a few months the stock takes a steep

downturn. This is often because of thelock-up period.

When a company goes public, the underwriters make companyofficialsand employees sign a lock-up

agreement. Lock-up agreements are legally binding contracts between the underwriters and insiders of

the company, prohibiting them from selling any shares of stock for a specified period of time. The period

can range anywhere from three to 24 months. Ninety days is the minimum period stated under Rule 144

(SEC law) but the lock-up specified by the underwriters can last much longer. The problem is, when

lockups expire all the insiders are permitted to sell their stock. The result is a rush of people trying to sell

their stock to realize their profit. This excess supply can put severe downward pressure on the stock

price.

Flipping

Flippingis reselling a hot IPO stock in the first few days to earn a quick profit. This isn't easy to do, and

you'll be strongly discouraged by your brokerage. The reason behind this is that companies want long-

term investors who hold their stock, not traders. There are no laws that prevent flipping, but your broker

may blacklist you from future offerings - or just smile less when you shake hands.

Of course, institutional investors flip stocks all the time and make big money. The double standard exists

and there is nothing we can do about it because they have the buying power. Because of flipping, it's a

good rule not to buy shares of an IPO if you don't get in on the initial offering. Many IPOs that have biggains on the first day will come back to earth as the institutions take their profits.

Avoid the Hype

It's important to understand that underwriters are salesmen. The whole underwriting process is

intentionally hyped up to get as much attention as possible. Since IPOs only happen once for each

company, they are often presented as "once in a lifetime" opportunities. Of course, some IPOs soar high

and keep soaring. But many end up selling below their offering prices within the year. Don't buy a stock

only because it's an IPO - do it because it's a good investment

Tracking stocksappear when a large companyspins offone of its divisions into a separate entity. The

rationale behind the creation of tracking stocks is that individual divisions of a company will be worth more

separately than as part of the company as a whole.
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What Is An

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Getting In

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IPO

Advantages

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Parameters

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Understanding The Role

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7/31/2019 An Initial Public Off

an initial public offering or initial purchase offer

Documents