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>1> IPO underwriter The underwriter provides value by being _one_ convenient transaction to sell my company's shares. Instead of haggling with 1000 individual

by jasode 9y ago

>1> IPO underwriter The underwriter provides value by being _one_ convenient transaction to sell my company's shares. Instead of haggling with 1000 individual investors on "price", I haggle with just the bankers at Goldman Sachs or Merril Lynch. The investment bank then wires me the money and I get to concentrate my efforts elsewhere (like the product) instead of fundraising. (Damnit Jim I'm a tech CEO and not a hedge fund portfolio salesman!) The investment bank is now on the hook for selling the shares to those 1000 investors. Also, the investment bank has the prestige and the rolodex of potential buyers. For me (say a young 20-something) to replicate that would require many golf games and champagne dinners that take my time away from improving the product. Saving me time is worth something, right? (Maybe not a 3% underwriting fee but it's definitely worth something.) Cutting out the underwriter also means I leave "money on the table" because many investors would rather buy initial shares from a reputable intermediary like Goldman Sachs rather than a startup like me. If you as a company, prefer to _do_ the same investor relationship work that underwriters do, by all means, skip the underwriter fees.

csomar 9y ago
That seems rather like someone is going to eat "the loss" than "providing value for both guys". The stock market is the mechanism that provides value for the buyer and seller. If you are selling before any price discovery is on, you are either getting screwed; or your investors are. If the investment bank could figure out the right price for the shares, why have the stock exchange in the first place.
- jasode 9y ago
  >The stock market is the mechanism that provides value If this was true in every circumstance, please consider why "market makers"[1] exist within the NYSE and London stock exchanges. If the stock market itself provides the value, buyers and sellers should find "market makers" redundant with zero value-added -- but that doesn't happen. Therefore, I propose that one doesn't compare investment bank IPO underwriters to a naked stock exchange. Instead, compare the underwriter to a "market maker". The underwriter can be seen as the first market maker for the initial offering. That's worth something to many owners of companies looking to get liquidity. [1] https://en.wikipedia.org/wiki/Market_maker#In_stock_exchange https://en.wikipedia.org/wiki/Market_maker#In_stock_exchange
  - sseveran 9y ago
    They are completely orthogonal. A market maker provides immediacy. Not all parties in a market want to trade at the same time. The market maker provides the service of immediacy, which they charge for. You are free not to use their service. You can place your own resting order, you can use an intraday cross, or a an opening or closing cross to access liquidity. You could also execute a block trade through a bank. You could use a dark pool. Or you could use some combination of all of them. The underwriter is like a market maker only in the fact that it is taking principal risk when it purchases the shares. It typically already has buyers lined up for all the shares and it does not face risk from the price changing between when the IPO is priced and trading starts. That is not to say that the bank is not without risk. It has obligations like price support for the IPO.
dlubarov 9y ago
> Instead of haggling with 1000 individual investors on "price", I haggle with just the bankers at Goldman Sachs or Merril Lynch. Well in an ideal world, companies shouldn't have to haggle at all -- a public auction should determine the IPO price. Or better yet, companies should be able to just submit sell orders as they see fit, without being required to make any volume or price commitments beforehand.
- beejiu 9y ago
  > a public auction should determine the IPO price An IPO is (usually) for a small amount of a company (5-10%) - hence the term "initial". Once the stock is traded, the market is continuously setting prices (essentially a continuous auction) and companies are able to sell more stock if they so wish. The reason IPOs are not also auctions (or market priced) is because that model has been tried and it doesn't work.
  - nordsieck 9y ago
    It seemed to work just fine for Google. What evidence do you have that it doesn't work well?
    - beejiu 9y ago
      Google's IPO auction famously just scraped the low-end of its estimate (after the range was revised down). It "popped" 18% on its first day of trading which - at very best - shows that dutch auction is no better than underwriting. " The offer price of $85 was well below initial expectations" (https://www.vcexperts.com/buzz_articles/252 https://www.vcexperts.com/buzz_articles/252)
      - dlubarov 9y ago
        According to https://www.iposcoop.com/the-ipo-buzz-a-dirty-dutch-auction/ https://www.iposcoop.com/the-ipo-buzz-a-dirty-dutch-auction/ "the mean average of all 21 [auction IPO] opening-day gain[s] was 1.25 percent". So it seems like Google was an anomaly, but Dutch IPOs in general are not leaving much money on the table compared to traditional IPOs.
ryandrake 9y ago
> (Maybe not a 3% underwriting fee but it's definitely worth something.) That's a good point, and applies to all of the previous poster's examples. Does your underwriter work 10x as hard to underwrite a 1B IPO than a 100M IPO? Is it 10x harder for a realtor to sell a $1M house than a $100K house? Does Visa work 10x harder on processing a $100 payment than it does on a $10 payment? It's crazy that these "services" charge a percentage of the transaction price. Why don't these guys get paid by the hour like most professional services? I'd love to get paid a fixed percentage of the price of the products that I work on, but that's ridiculous!
- cortesoft 9y ago
  There are a TON of businesses that get paid a fixed percentage of the price of a product.
javiramos 9y ago
Interesting anecdote: https://www.americaninno.com/boston/unlike-facebook-and-its-wall-street-ipo-sam-adams-went-public-for-the-people/ https://www.americaninno.com/boston/unlike-facebook-and-its-...

by jasode 9y ago

csomar 9y ago

That seems rather like someone is going to eat "the loss" than "providing value for both guys". The stock market is the mechanism that provides value for the buyer and seller. If you are selling before any price discovery is on, you are either getting screwed; or your investors are. If the investment bank could figure out the right price for the shares, why have the stock exchange in the first place.

jasode 9y ago
>The stock market is the mechanism that provides value If this was true in every circumstance, please consider why "market makers"[1] exist within the NYSE and London stock exchanges. If the stock market itself provides the value, buyers and sellers should find "market makers" redundant with zero value-added -- but that doesn't happen. Therefore, I propose that one doesn't compare investment bank IPO underwriters to a naked stock exchange. Instead, compare the underwriter to a "market maker". The underwriter can be seen as the first market maker for the initial offering. That's worth something to many owners of companies looking to get liquidity. [1] https://en.wikipedia.org/wiki/Market_maker#In_stock_exchange https://en.wikipedia.org/wiki/Market_maker#In_stock_exchange
- sseveran 9y ago
  They are completely orthogonal. A market maker provides immediacy. Not all parties in a market want to trade at the same time. The market maker provides the service of immediacy, which they charge for. You are free not to use their service. You can place your own resting order, you can use an intraday cross, or a an opening or closing cross to access liquidity. You could also execute a block trade through a bank. You could use a dark pool. Or you could use some combination of all of them. The underwriter is like a market maker only in the fact that it is taking principal risk when it purchases the shares. It typically already has buyers lined up for all the shares and it does not face risk from the price changing between when the IPO is priced and trading starts. That is not to say that the bank is not without risk. It has obligations like price support for the IPO.

dlubarov 9y ago

> Instead of haggling with 1000 individual investors on "price", I haggle with just the bankers at Goldman Sachs or Merril Lynch. Well in an ideal world, companies shouldn't have to haggle at all -- a public auction should determine the IPO price. Or better yet, companies should be able to just submit sell orders as they see fit, without being required to make any volume or price commitments beforehand.

beejiu 9y ago
> a public auction should determine the IPO price An IPO is (usually) for a small amount of a company (5-10%) - hence the term "initial". Once the stock is traded, the market is continuously setting prices (essentially a continuous auction) and companies are able to sell more stock if they so wish. The reason IPOs are not also auctions (or market priced) is because that model has been tried and it doesn't work.
- nordsieck 9y ago
  It seemed to work just fine for Google. What evidence do you have that it doesn't work well?
  - beejiu 9y ago
    Google's IPO auction famously just scraped the low-end of its estimate (after the range was revised down). It "popped" 18% on its first day of trading which - at very best - shows that dutch auction is no better than underwriting. " The offer price of $85 was well below initial expectations" (https://www.vcexperts.com/buzz_articles/252 https://www.vcexperts.com/buzz_articles/252)
    - dlubarov 9y ago
      According to https://www.iposcoop.com/the-ipo-buzz-a-dirty-dutch-auction/ https://www.iposcoop.com/the-ipo-buzz-a-dirty-dutch-auction/ "the mean average of all 21 [auction IPO] opening-day gain[s] was 1.25 percent". So it seems like Google was an anomaly, but Dutch IPOs in general are not leaving much money on the table compared to traditional IPOs.

ryandrake 9y ago

> (Maybe not a 3% underwriting fee but it's definitely worth something.) That's a good point, and applies to all of the previous poster's examples. Does your underwriter work 10x as hard to underwrite a 1B IPO than a 100M IPO? Is it 10x harder for a realtor to sell a $1M house than a $100K house? Does Visa work 10x harder on processing a $100 payment than it does on a $10 payment? It's crazy that these "services" charge a percentage of the transaction price. Why don't these guys get paid by the hour like most professional services? I'd love to get paid a fixed percentage of the price of the products that I work on, but that's ridiculous!

cortesoft 9y ago
There are a TON of businesses that get paid a fixed percentage of the price of a product.

javiramos 9y ago

Interesting anecdote: https://www.americaninno.com/boston/unlike-facebook-and-its-wall-street-ipo-sam-adams-went-public-for-the-people/ https://www.americaninno.com/boston/unlike-facebook-and-its-...