When Facegroomers, Inc. decided to take their facial hair care product company public and were looking for an IPO underwriter, our firm stepped in and said we’d be their huckleberry. It seemed like a no-brainer at the time. Six months later, the CEO of Facegroomers has been indicted for tax fraud, the CFO has been accused of cooking the company’s books, the CAO is due in court regarding her third DUI, and (and this was just the icing on this whole disastrous cake), it turns out the company’s spokesperson’s beard is fake. We’re beginning to think that there is no way we’ll be able to sell Facegroomers stock for anything near what we once thought we would.
Luckily for us, our underwriting agreement has a “market out clause,” which means we have the option of just walking away from this entire mess. Market out clauses exist to protect the underwriting firm against circumstances that make it difficult (or, in the case of Facegroomers, dang near impossible) to deliver what was promised: decent stock sales.
These circumstances have to be spelled out in the underwriting agreement. For example, we can’t just decide one day that fake beards are a dealbreaker and walk away. Typically, those circumstances fall into one of two categories: either something has happened that’s going to severely damage the organization’s IPO and make it impossible to sell their stock (like what’s going on with Facegroomers), or the market in general is behaving so badly that no one’s making money selling anything.
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Finance: What is an Underwriter?81 Views
finance a la shmoop what is an underwriter Undertaker underwriter
taking your company public well then you need one of these guys and yeah if [Woman writing at a desk]
things go poorly well then you may need one of these guys but if things go well [Gravestone]
an underwriter will get to know your company audit your financials give their
Good Housekeeping Seal of Approval to the investment community with whom they
deal regularly and introduce you as part of their family selling a piece of your
company to that world you know hedge funds mutual funds private wealthy [List of benefits that come with an underwriter]
investors such that they are the you know financial wind beneath your wings [Skyscraper flying away]
for a brief moment in time the underwriter usually an investment bank
like the vaunted Goldman Sachs or Morgan Stanley or JP Morgan or UBS or Sumitomo
will actually themselves own whatever piece of your company you are bringing [Logos for the banks appearing]
public like if you're selling 18 million shares at 20 bucks the bank's our
underwriters take a new public will own all 18 million shares having paid you
$19.60 for them and then turning around five minutes later and selling them for
20 bucks to John Q invest or making 40 cents a share in spread or markup or in [Spread calculation shown]
this case 40 times 18 million or 7.2 million dollars just for the pleasure so
that's an underwriter and if they screw up well yeah and ironically the [Underwriter stamp]
announcement he'll see in the digital paper is usually in the shape of a
tombstone announcing everything why a tombstone well because it represents the
death of ambiguity or confusion in that company's former life as a private one [Gravestone for ambiguity]
The Undertaker's hopefully have far far away [The Undertaker running away with the word confusion]