3 ms·

Obligatory: underwriters usually price IPOs at a discount (called "underpricing") and preferred investors get the benefit of that in this early "pop."

dman 8y ago
Also the reason you pay underwriters is to engineer the pop, so underpricing might not be all there is to it.
- alexpetralia 8y ago
  Hm isn't it the listing firm who pays the underwriters? Why would they want to "engineer" a pop? The bigger the pop between the listing price and what the price settles at, the less cash the listing firm raised relative to what they could have raised. Even existing shareholders don't really benefit from a pop because they would be able to sell at the "true" market price that the listing firm _should have raised_ at, as well as the true marketing price that the price eventually reaches. The only people who benefit are those who got in between the listing price and the closing pop price - at the expense of the listing firm.
  - huac 8y ago
    so they can get headlines like "lyft pops 21%", that's great publicity
    - alexpetralia 8y ago
      The question of course is how much it costs! :)
  - 1024core 8y ago
    If you really want to get the full market value out of your IPO, you should use something like a Dutch Auction https://www.investopedia.com/terms/d/dutchauction.asp https://www.investopedia.com/terms/d/dutchauction.asp IIRC Google did that, and didn't experience a first-day pop. The company sells its shares to the underwriter at the IPO price; so the company gets the money up front from the underwriter. It is in the company's interest to price it as high as it can; and in the underwriter's interest to price it as low as it can. If the underwriter wins, you see a pop; if the company wins, you see flat or a decline. This is why a Dutch Auction is the best option for IPOs, but underwriters hate that (insert "the underwriters hate him!" meme).
    - mandeepj 8y ago
      FB also did that. It closed only $0.23 above the IPO price and down $3.82 from the opening bell value https://en.wikipedia.org/wiki/Initial_public_offering_of_Facebook#First_day https://en.wikipedia.org/wiki/Initial_public_offering_of_Fac...
caprese 8y ago
> and preferred investors get the benefit of that in this early "pop." yeah but if you sell the first day you'll never get an allocation again, word gets around. so leverage up and do it once with a lot of money and hope the IPO bid doesn't break apart.
hinkley 8y ago
But it's a balance, isn't it? Since the company is selling most of the shares (if not all), then the higher the opening price the more money the company to invest in growth and R&D. You take that money and build a new product, improve an old one, shutter a competitor via buyout, or ramp up production in another factory (so you have more capacity and can't get gouged as badly by your one manufacturer). If instead you screw them over, doesn't that kill P/E and hence greatly lower the predicted future gains?

dman 8y ago

Also the reason you pay underwriters is to engineer the pop, so underpricing might not be all there is to it.

alexpetralia 8y ago
Hm isn't it the listing firm who pays the underwriters? Why would they want to "engineer" a pop? The bigger the pop between the listing price and what the price settles at, the less cash the listing firm raised relative to what they could have raised. Even existing shareholders don't really benefit from a pop because they would be able to sell at the "true" market price that the listing firm _should have raised_ at, as well as the true marketing price that the price eventually reaches. The only people who benefit are those who got in between the listing price and the closing pop price - at the expense of the listing firm.
- huac 8y ago
  so they can get headlines like "lyft pops 21%", that's great publicity
  - alexpetralia 8y ago
    The question of course is how much it costs! :)
- 1024core 8y ago
  If you really want to get the full market value out of your IPO, you should use something like a Dutch Auction https://www.investopedia.com/terms/d/dutchauction.asp https://www.investopedia.com/terms/d/dutchauction.asp IIRC Google did that, and didn't experience a first-day pop. The company sells its shares to the underwriter at the IPO price; so the company gets the money up front from the underwriter. It is in the company's interest to price it as high as it can; and in the underwriter's interest to price it as low as it can. If the underwriter wins, you see a pop; if the company wins, you see flat or a decline. This is why a Dutch Auction is the best option for IPOs, but underwriters hate that (insert "the underwriters hate him!" meme).
  - mandeepj 8y ago
    FB also did that. It closed only $0.23 above the IPO price and down $3.82 from the opening bell value https://en.wikipedia.org/wiki/Initial_public_offering_of_Facebook#First_day https://en.wikipedia.org/wiki/Initial_public_offering_of_Fac...

caprese 8y ago

> and preferred investors get the benefit of that in this early "pop." yeah but if you sell the first day you'll never get an allocation again, word gets around. so leverage up and do it once with a lot of money and hope the IPO bid doesn't break apart.

hinkley 8y ago

But it's a balance, isn't it? Since the company is selling most of the shares (if not all), then the higher the opening price the more money the company to invest in growth and R&D. You take that money and build a new product, improve an old one, shutter a competitor via buyout, or ramp up production in another factory (so you have more capacity and can't get gouged as badly by your one manufacturer). If instead you screw them over, doesn't that kill P/E and hence greatly lower the predicted future gains?