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Finance: What is a greenshoe option? 15 Views

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What is a greenshoe option? When Morgan Stanley launched Facebook’s IPO, they had humongous demand. The demand was so great that Morgan Stanley triggered the greenshoe option in their investment banking agreement, which is the right to sell an additional amount (up to 10% in most cases) of stock into the IPO. The bookrunner firm buys the stock at a predetermined lower price and pockets the additional profit from the market. The overage sell option is called a greenshoe option because the first instance of its use was for a company called the Green Shoe Company back in the early 1900s.

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00:00
finance a la shmoop what is a greenshoe option. oh you should be so lucky
00:09
green shoes on leprechauns and investment bankers are such a good thing. [leprechaun smiles]
00:14
why? well because when there is so much excess money laying all over the floor
00:20
your shoes turn green from the bills as you take whatever money you can carry
00:25
and run. that's how the name happened anyway a greenshoe option is a deal term

00:30
that an investment bank negotiates for in an IPO they run. and that IPO remember
00:35
is an initial public offering of stock. this can apply also to secondary
00:40
offerings and other kinds of offerings but we're focused on an IPO here as a
00:43
green shoe lives. if that IPO is marketed so well and there is so much demand for
00:49
shares in the company from the public that the bank believes it can raise the
00:53
IPO price and sell more shares to the public then that IPO was a huge winner.
00:59
the bank will exercise its greenshoe option and instead of selling 30 million [money falls from the sky]
01:04
shares of Chucky LARM calm to the public at 12 bucks a share well it'll bring the
01:09
company public at 15 bucks a share and sell 40 million shares. the math? it
01:15
raises 600 million bucks in the latter green shoe field option versus 360
01:21
million bucks in the former. the green shoe is the extra 10 million shares that
01:27
the bank can sell and get commission on while doing so. and if you think about
01:32
that world as a 5% kind of Commission world well the banks go from 18 million
01:37
in total Commission's to 30 million. yeah nice freakin bump especially when
01:42
there's a basic fixed cost of maybe 10 million dollars in either case. so you
01:47
make a lot more profit on the 30 million story here yeah? all right and having
01:51
more shares out there trading is a good thing for the company because its shares
01:55
are then more liquid. it's easier to buy and sell larger blocks of stock and the [stocks being sold in a graphic]
02:00
big institutions like that. they tend to then take a lot more
02:03
interest in the stock and usually that leads to higher stock prices down the
02:06
line. and all that liquidity or movement shares trading back and forth well
02:11
that's more Commission dollars in the future for the bank. so check your shoes
02:16
if they're green well you're either in the money or you should really get Rover
02:20
to the vet. [green poo on a wood floor]
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