Overallotment

  

Categories: IPO, Banking

See: Greenshoe. See: Underwriter.

Overallotment is the new and improved, more PC term for the option to sell more shares to the public in a given offering.

When bankers have done such an awesome job hyping...er, um, marketing a given security for sale to the public, they often receive the automatic right to sell a chunk more to the quivering, hungry masses. Like...if PJ SilverSlacks is selling 10 million shares of whatever.com to mutual and hedge funds and family offices all over the world, and they do a great job marketing, then their overallotment allowance might be something like 1.5 million extra shares, for a total sale to the public of 11.5 million shares.

Remember that they get commission on each share. Call it a nickel? A dime? Sometimes they take a spread in buying at $19.70 and reselling at $20. Depends on the flavor of the underwriter's agreement. But that's the gist.

So once the infrastructure is all paid for (meaningful fixed cost), then the contribution margin of additional shares sold is very high. That is, the sale of those additional shares didn't really cost the underwriter much, so they are happy to sell. And in most cases, companies, at the right price, are all too happy to dilute themselves a tad more but raise a boatload more cash. Everyone's happy in a bull market.

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