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Principles of Finance: Unit 1, The IPO Checklist 29 Views


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Description:

There are many items on the IPO checklist, having to do with earnings, shares, spread, etc. Everyone get your pencils ready.

Language:
English Language

Transcript

00:00

principles of finance a la shmoop. the IPO checklist. short operating

00:07

history .no dividends, often no earnings. so why do investors love IPOs so much? [checklist shown]

00:14

and because so often the stock prices of IPOs are under priced dramatically on

00:20

purpose. the shares zoom upwards that first day of trading in a few cases eBay

00:25

Yahoo LinkedIn Tesla and others the stock price is way more than doubled in

00:30

the first day or three of trading. that's the good the bad is that most IPOs are [charts]

00:35

actually terrible, but investors love lottery tickets and they'll keep putting

00:39

5 bucks on red 32 on the roulette wheel until somebody forces them to you know

00:44

stop. so why do i POS zoom? well a lot of it is about unknowns. investment banks

00:50

technically owned the entire company for a brief moment in time and they don't

00:54

like to take a risk before they turn around and sell it to the public. think

00:57

about it. works like this. the bank is taking the company public and they buy [flow chart]

01:01

all the shares it's selling to the public for let's say 15 dollars and 50 cents a

01:06

share, and like five minutes later they turn around and dump them at sixteen

01:10

bucks. 50 cent spread their got it if the bank has done a great job marketing the

01:15

IPO to mutual funds and hedge funds and private investors buying them

01:19

well then demand for those shares is often a multiple of the supply of those

01:23

shares available to buy. got it ?demand higher than supply so stock prices go up.

01:28

alright and this is not done by accident or out of the banks kindly goodwill. by [man gives presentation]

01:32

having demand 3 for 20 times the supply the certainty that the bank will be able

01:38

to fully sell out all of its shares that it bought for 15 .50 or whatever the

01:43

price was will be very high. and in most IPO deals there is what's called a

01:48

greenshoe option, or over allotment option for the bank. that is if the bank

01:54

is supposed to be selling 10 million shares of a given company.com in an IPO [flow chart]

01:59

well the bank has the option to sell 12 million shares if the demand is there to

02:03

give it price. meaning they could sell 2 million more and that's why you'll read

02:06

about here about or see on CNBC initial red herring whisper prices that always

02:12

start out it's crazy low number like 10 bucks a share

02:15

and then magically seemed to creep upwards toward 15.50 well banks start low [definitions on a white board]

02:20

gain interest from early adopter investors and if demand is for well 80

02:25

million shares on a 10 million share base at 14 bucks while the bank likely

02:30

has little risk in raising the final IPO offering price to 15.50 and

02:35

having some cheapskates go away so that there is a ventral demand for 60 million

02:40

shares at the higher 15.50 going on $16 price and at that price. the bank can

02:46

sell 12 million shares instead of 10 million shares and on the margin that's [definitions on screen]

02:50

a big deal to the banking team who brought public the company. they're

02:54

making 50 cents a share spread on the shares right so on 10 million shares

02:58

they make 5 million and well for almost no extra effort or at least very little

03:02

extra effort they make an additional million bucks selling 2 million more

03:07

shares at 50 Cent's spread in the green shoe effort. and the companies love this [equations]

03:11

because they raise more capital at a higher price gives a little more cushion

03:15

a little more dough to go by that water fountain with the cores neon sign thingy

03:20

in the lobby. alright well note that IPO teams usually

03:23

comprised four or five individuals who tap into many resources along the way

03:28

mostly in the form of lawyers and accountants and other suit-wearing [man in suit frowns]

03:31

bureaucrats. so an extra million bucks goes a long way toward paying the

03:35

bonuses of the group at the end of the year, like if you think if you could do

03:38

one of those each month yeah that'd be grand. well being able to sell more

03:41

shares rather than less is a good thing for the company as we've noted. the [equations]

03:45

company has more shares trading in the public market which adds liquidity

03:49

making it easier for buyers to buy and sellers to sell the stock. and the big

03:54

investors love that. well that liquidity lowers the

03:57

transaction costs of trading in the stock, that is like there's lots of

04:01

shares so you don't need five cents Commission to keep everyone happy per [flow chart]

04:04

share it could be like four cents or three cents but you got a lot of shares

04:08

trading it's a lot of spread it's good for all the traders and that transaction

04:11

cost is essentially a tax on the trade and lower taxes are always good for

04:16

commerce. I'm looking at you Congress. all right well the heat the bank generates

04:20

is good for another reason as well the company had originally budgeted to spend [fire in a pit]

04:24

based on a raise ten million chairs at ten bucks are a

04:28

hundred million dollars of new capital, but for only modestly more dilution well

04:33

they'll have sold 12 million shares at 15.50 net to them -remember the bank sells

04:38

it at sixteenth of company keeps fifteen fifty. or said another way they've just [equations]

04:42

raised a hundred eighty six million instead of a hundred million and that's

04:45

a good thing it'll be a really nice holiday party in year one as a public

04:49

company so that's the reward. all right what about the risk ?well there's lots of

04:53

it you can imagine a situation where a company is only marginally

04:56

oversubscribed like demand for twenty million in their supply of 15 million.

05:01

and the bank is unable to raise prices along the journey of its IPO marketing [flow chart]

05:06

Roadshow. the bank could in theory find itself holding 10 million shares of

05:11

piece-of-crap.com when skittish investors 8 minutes before the IPO

05:15

decide to call in sell at any price orders to their traders in many deal

05:21

cases. in order to win the IPO the bank has to agree to buy and hold the set of

05:26

number of shares itself like as a proprietary trading in its own coffers

05:30

the bank's money is at risk. so if the deal was bought by the bank at 10 bucks [flow chart]

05:35

a share and it sold down to 5 bucks a share and by the way people that's about

05:39

what happened to Amazon on its IPO. while the bank could be left holding a heavy

05:44

lead filled bag in the ocean and oh by the way that's also not good for the

05:49

clients of the bank who rely on it to only give them "good deals" in quotes and

05:54

we chuckle at that. a few piece-of-crap.coms and while most banks capital [man gives presentation]

05:58

markets teams are out of business.

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