7 ms·

Opening down or trading below what the stock priced at in the short term has a strong stigma attached to it and can make retail and institutional investors thin

by neilc 15y ago

Opening down or trading below what the stock priced at in the short term has a strong stigma attached to it and can make retail and institutional investors think there is something systemically wrong with the company regardless of the fundamentals. I understand there's a stigma, but why does the stigma exist? Let's just assume that the investment bank's only goal is to accurately predict the demand for a new IPO, and to set the offer price accordingly; why is overpredicting demand stigmatized whereas underpredicting is not?

biot 15y ago
The same way that selling someone a house for $1 million and the next day it's worth $900K looks bad on the seller since they're promoting it as a good investment.
- davidw 15y ago
  If I sold a house to someone for 200,000 and they told me it was a good deal, I'd be very irate to find that they'd turned around and sold it for 400,000 the next day.
  - ceejayoz 15y ago
    Sure, but you built the house for a few grand. I can't imagine the LNKD investors are too disappointed about a $300+ million payday.
    - davidw 15y ago
      They certainly made their pile, so I guess they're not 'unhappy', but still, it just seems that the only sensible thing to do would be to use a market to determine prices. That's what they're there for, right?
      - davidw 15y ago
        Also: with all the 'blah blah' that you hear about companies taking uncomfortable decisions due to a "fiduciary duty to shareholders to maximize profits", taking this sort of hit seems quite askance.
      - ceejayoz 15y ago
        Isn't that what happened?
        davidw 15y ago
        Obviously not. Someone at the investment bank pulled a price out of their ass, which was what the shares were initially quoted at. They subsequently rose a great deal on the actual market. I'm not a market "fundamentalist", but they're an awfully good way of pricing things in many circumstances compared to the central planning approach of having several experts decided on a price. I'm no economist, but I'm sure a clever one could find a good way to auction off IPO shares to get the best deal possible for the company.
        ceejayoz 15y ago
        > Someone at the investment bank pulled a price out of their ass... It's an IPO, and the first social media network to do one. New territory, doubly so. Of course they pulled a price out of their asses. If LinkedIn didn't like that price, they'd have gone elsewhere. They didn't. They could've affected the price, too, or chosen an auction.
        lurker19 15y ago
        GOOG did, remember.
    - brown9-2 15y ago
      I'd be a little bothered with $300 million if I could have had close to $600 million instead - especially knowing that the difference went to the middle-men in the deal.
      - mdda 15y ago
        The middle-men (investment bankers, in this case) didn't make the $300 million profit - they sold it to people who manage money, that made the profit. Typically, the biggest blocks of money for IPO investing will be institutional investors : meaning that the actual beneficiaries will be the pension funds, and investment funds of regular people. The sources of profit to 'Wall Street' are the 7% underwriting fee (which is an enduring travesty, IMO) and performance fees on the managed money (which get a boost because the underlying fund appreciated step-wise). Regular performance fees are mostly related just to the size of the fund (approximately 1%) - so the effect of the IPO jump on an overall fund will be negligible. However, individual managers potentially benefit indirectly because their performance relative to their peers would improve, and they may be able to get bigger portfolios to manage (which is the big win for an institutional money manager). If the IPO buyers were hedge-funds, then they would benefit from a 20% performance kicker (which is why people at hedgefunds can be very handsomely rewarded). OTOH, the hedgefund investors would likely just be 'flipping' the shares within a couple of days - so they're less attractive/stable initial holders than the investment banks would ideally like for a 'solid' IPO.
    - mayukh 15y ago
      Who cares how much the cost to you was? All that matters is the market price, and you were lied to about that. >> I can't imagine the LNKD investors are too disappointed about a $300+ million payday. << That is exactly the sort of cavalier attitude folks on wall street display when these issues persist - "who cares, we made you a lot of money didn't we?". When in fact their responsibility is to try and find the most accurate price and minimize risk to the underwriters. The thing is like others have mentioned, there is a degree of "buyer beware" going on here. Its not like LinkedIn had no clue about the market situation. They probably had a staff of ex-bankers (like most tech companies do) help them price the offering too. It's just the nature of the beast. Taking companies public is an oligopolistic business and till we figure out alternative ways of doing this (a-la google tried) this is going to be a perennial problem.
      - ceejayoz 15y ago
        > All that matters is the market price, and you were lied to about that. There isn't a "market price" until it goes on the market. Nothing prevented LinkedIn from having their own experts (and I suspect they did) weigh in on the proper price.
  - nikcub 15y ago
    This analogy isn't correct - and I am surprised that there are experts using it in their analysis. It would be like selling 10 of the bricks from the house for $10, and then the guy you sell them to turns around and sells them for $20. Far from being upset, you now realize that the remainder of your 150 bricks just doubled in value. To complicate the analogy further, you would need to sell 10 bricks to 10 different people and spend a month negotiating the price to a point where everybody agrees on the same price - which is the problem with an IPO. There are even further complications with LinkedIn in particular, but needless to say the analogy falls apart very quickly.
    - joezydeco 15y ago
      But I tore down that wall and sold those 10 bricks so I could build an addition to house the 5 new kids I'd like to have soon and grow my family. It's not as important that my remaining 150 bricks are more valuable. I can't sell those right now. But I could have built an addition 2X the size if I had gotten 2X cash for the bricks I sold.
adamtmca 15y ago
Often the underwriters will have to buy the stock at the price they set (it costs the bank money in that case) also it means the company may have failed to raise the funds they had planned to with the offering.
arethuza 15y ago
"Let's just assume that the investment bank's only goal is to accurately predict the demand for a new IPO" I'd say that their main goal is to make sure that the shares are all sold at a price that everyone is happy with - the management team of the company going public is heavily involved in all the steps on an IPO. Like taking VC money, nobody makes you go public and both are things to do with your eyes wide open.
- pemulis 15y ago
  Well, there's the SEC.
  - veyron 15y ago
    technically speaking the SEC does not force you to go public. The problem most people refer to: if you have over 500 shareholders of record, you have to make a lengthy filing which is almost as onerous as going public. Hence, since the incremental effort isn't that much, most companies in that position go public. There's technically no compulsion to do so.
pbreit 15y ago
Because overpricing makes it look like there is a lack of interest which is a terrible appearance for anything, really.

by neilc 15y ago

biot 15y ago

The same way that selling someone a house for $1 million and the next day it's worth $900K looks bad on the seller since they're promoting it as a good investment.

davidw 15y ago
If I sold a house to someone for 200,000 and they told me it was a good deal, I'd be very irate to find that they'd turned around and sold it for 400,000 the next day.
- ceejayoz 15y ago
  Sure, but you built the house for a few grand. I can't imagine the LNKD investors are too disappointed about a $300+ million payday.
  - davidw 15y ago
    They certainly made their pile, so I guess they're not 'unhappy', but still, it just seems that the only sensible thing to do would be to use a market to determine prices. That's what they're there for, right?
    - davidw 15y ago
      Also: with all the 'blah blah' that you hear about companies taking uncomfortable decisions due to a "fiduciary duty to shareholders to maximize profits", taking this sort of hit seems quite askance.
    - ceejayoz 15y ago
      Isn't that what happened?
      - davidw 15y ago
        Obviously not. Someone at the investment bank pulled a price out of their ass, which was what the shares were initially quoted at. They subsequently rose a great deal on the actual market. I'm not a market "fundamentalist", but they're an awfully good way of pricing things in many circumstances compared to the central planning approach of having several experts decided on a price. I'm no economist, but I'm sure a clever one could find a good way to auction off IPO shares to get the best deal possible for the company.
        ceejayoz 15y ago
        > Someone at the investment bank pulled a price out of their ass... It's an IPO, and the first social media network to do one. New territory, doubly so. Of course they pulled a price out of their asses. If LinkedIn didn't like that price, they'd have gone elsewhere. They didn't. They could've affected the price, too, or chosen an auction.
        lurker19 15y ago
        GOOG did, remember.
  - brown9-2 15y ago
    I'd be a little bothered with $300 million if I could have had close to $600 million instead - especially knowing that the difference went to the middle-men in the deal.
    - mdda 15y ago
      The middle-men (investment bankers, in this case) didn't make the $300 million profit - they sold it to people who manage money, that made the profit. Typically, the biggest blocks of money for IPO investing will be institutional investors : meaning that the actual beneficiaries will be the pension funds, and investment funds of regular people. The sources of profit to 'Wall Street' are the 7% underwriting fee (which is an enduring travesty, IMO) and performance fees on the managed money (which get a boost because the underlying fund appreciated step-wise). Regular performance fees are mostly related just to the size of the fund (approximately 1%) - so the effect of the IPO jump on an overall fund will be negligible. However, individual managers potentially benefit indirectly because their performance relative to their peers would improve, and they may be able to get bigger portfolios to manage (which is the big win for an institutional money manager). If the IPO buyers were hedge-funds, then they would benefit from a 20% performance kicker (which is why people at hedgefunds can be very handsomely rewarded). OTOH, the hedgefund investors would likely just be 'flipping' the shares within a couple of days - so they're less attractive/stable initial holders than the investment banks would ideally like for a 'solid' IPO.
  - mayukh 15y ago
    Who cares how much the cost to you was? All that matters is the market price, and you were lied to about that. >> I can't imagine the LNKD investors are too disappointed about a $300+ million payday. << That is exactly the sort of cavalier attitude folks on wall street display when these issues persist - "who cares, we made you a lot of money didn't we?". When in fact their responsibility is to try and find the most accurate price and minimize risk to the underwriters. The thing is like others have mentioned, there is a degree of "buyer beware" going on here. Its not like LinkedIn had no clue about the market situation. They probably had a staff of ex-bankers (like most tech companies do) help them price the offering too. It's just the nature of the beast. Taking companies public is an oligopolistic business and till we figure out alternative ways of doing this (a-la google tried) this is going to be a perennial problem.
    - ceejayoz 15y ago
      > All that matters is the market price, and you were lied to about that. There isn't a "market price" until it goes on the market. Nothing prevented LinkedIn from having their own experts (and I suspect they did) weigh in on the proper price.
- nikcub 15y ago
  This analogy isn't correct - and I am surprised that there are experts using it in their analysis. It would be like selling 10 of the bricks from the house for $10, and then the guy you sell them to turns around and sells them for $20. Far from being upset, you now realize that the remainder of your 150 bricks just doubled in value. To complicate the analogy further, you would need to sell 10 bricks to 10 different people and spend a month negotiating the price to a point where everybody agrees on the same price - which is the problem with an IPO. There are even further complications with LinkedIn in particular, but needless to say the analogy falls apart very quickly.
  - joezydeco 15y ago
    But I tore down that wall and sold those 10 bricks so I could build an addition to house the 5 new kids I'd like to have soon and grow my family. It's not as important that my remaining 150 bricks are more valuable. I can't sell those right now. But I could have built an addition 2X the size if I had gotten 2X cash for the bricks I sold.

adamtmca 15y ago

Often the underwriters will have to buy the stock at the price they set (it costs the bank money in that case) also it means the company may have failed to raise the funds they had planned to with the offering.

arethuza 15y ago

"Let's just assume that the investment bank's only goal is to accurately predict the demand for a new IPO" I'd say that their main goal is to make sure that the shares are all sold at a price that everyone is happy with - the management team of the company going public is heavily involved in all the steps on an IPO. Like taking VC money, nobody makes you go public and both are things to do with your eyes wide open.

pemulis 15y ago
Well, there's the SEC.
- veyron 15y ago
  technically speaking the SEC does not force you to go public. The problem most people refer to: if you have over 500 shareholders of record, you have to make a lengthy filing which is almost as onerous as going public. Hence, since the incremental effort isn't that much, most companies in that position go public. There's technically no compulsion to do so.

pbreit 15y ago

Because overpricing makes it look like there is a lack of interest which is a terrible appearance for anything, really.