Think: volatile IPO, pre-pricing. Lots of ambiguity. Is this company AMZN? Or is it uh...Groupon. Or worse?
The offering price is the price the bankers are setting such that buyers...buy. So if a given company is going to come public by selling 10 million shares at an offering price of $20, then the company itself might keep $19.50 times 10 million, or $195 million; the bank keeps 50 cents a share, or $5 million. If the IPO is hot, then the first publicly traded print might be like $32.40 and go up from there. That price doesn't matter to the company, however. They've already sold their 10 million shares at $19.50, "under pricing" themselves by a dozen bucks or so a share.
And this whole notion of under pricing is kind of a kitschy click-bait-getting thing from journalists who don't really live inside or understand the trenches of how companies actually come public. In fact, IPOs generally "need to be" under priced so that there is certainty of getting all the shares placed, and so that if the markets are choppy, the IPO price doesn't trade below the offering price. If it does, then original buyers who paid $20 will be angry and not return when the stock is at $18 or $15 or $10. Huge work then to repair damaged relationships.
So, in fact, in most cases, it's the company itself who leans conservative in the pricing of their IPO, because they'd rather raise a bit less money, sell a few fewer shares, but have a public currency...than wrest evey penny from the offering and then go into a soft market (through no fault of their own) and have their IPO be quickly underwater, and lose sponsorship from the Street. If they get greedy later, they can always sell more shares in a secondary offering at that $32-ish price and go nuts. High-priced nuts.
Related or Semi-related Video
Finance: What is a Secondary Offering?16 Views
finance a la shmoop. what is a secondary offering?
okay so hangers has gone public. in an IPO that was its primary offering. hint hint.
and hangers yes well they sell hangers. well hey if Staples can do it you know [man stands in front of hangers]
why not? anyway well how'd they go public well yes it was an IPO or initial public
offering, the first offering of formerly private shares to the public. but here
we're talking about a secondary offering so what does that mean? well usually
young companies have a bunch of insiders- people like the founders and the
employees and the original investors, and everyone wants to buy a home a Porsche a
diamond-studded Fitbit ,you know whatever. and in many cases the shares of these
early companies like hangers, represent almost all of the net worth of the
insider. so understandably they want to not have all of their eggs in one basket
or one stock in this case right? well they want to diversify. that is they want [eggs in a basket]
to sell some of their shares and get cash and then go buy a home a car or buy
bonds or a mutual fund or an index fund or some other presumably safer
investment vehicle than hangers. well the rule in most cases is that insiders
cannot sell their own shares until at least six months and change after the
company has begun trading publicly. it's called the 144 a rule. write that down
actually don't write down. all right but when they do sell they generally want to
work as a team so that their shares can be placed into the hands of funds who
have demand to hold their shares awhile right> they don't want to just dump the
shares into the market crater the stock and well basically screw everyone else.
how is this important? well let's think through a process here if everyone just
hit the panic dump button at 6:31 a.m. California time, the day that they could [dump button pictured]
first legally sell shares, well odds are good that the stock price which had been
hovering nicely at $32 and 12 cents a share give or take a dime or two, would
suddenly plunge with the massive extra supply of shares,
and not a splurge in demand to meet it. so then all of a sudden the stock is at
23 bucks a share and falling and the marketplace thinks that don't know
somebody something must be wrong with this somebody must know something so we
should dump too. and then it's kind of like sympathy stock diarrhea and not a
good situation as the stock is looking at 12 bucks. so normally the investment
bank who took the company public in the first place would circle with the [bankers and investors placed in a circle]
investors who bought in and are still holding the shares of hangers and they
place more shares in their hands. and they do this in the form of what is
called a secondary offering, yes it took us a while to get there but we did, which
is largely like an IPO lite. the management team might need to meet with
a fifth or a tenth as many of the investors they met on the IPO, and just
refresh conversations as they relate to publicly available information and
guidance on how well or poorly the company is doing, then they place those
shares that is sell say 2,000 of them per person and well you know they move
on. then they place those shares and let's say there's five million of them [stack of stocks]
and they spread them around to all the mutual funds and hedge funds buying them,
and then give the insiders their cash. so now a whole new group of folks have been
given the enviable opportunity to own hangars and while the employees and
investors that have been there since day one yeah well they get to cash out at
least partly, and let's just say that for them driving to work is now a thing of
the past. [man uses laptop from bed with an empty bag of chips next to him]
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