An IPO is kind of like the moment when a parent takes the training wheels off their kid's bike for the first time. They run alongside the bike for the first few feet, but eventually let go, standing proudly in the street as their kid rides off into the distance.
The reverse greenshoe option is there in case the kid runs directly into a parked car.
In an initial public offering, a company lists its stock on a public exchange for the first time. Typically, there's an offering price, which is the price at which the stock first goes public. Then the shares are off, trading moment to moment, day to day, like any other stock. (That's the "let go of the bike" moment.)
A well-managed IPO will see shares rise early in their trading career. Market demand will be higher than the amount of stock offered. No one wants their stock to go public at $15 and instantly drop to $13. It shows a lack of confidence by the market, and doesn't allow much room to pay off those folks who got in on the deal early, buying shares at the offering price.
Ideally, the stock will see an initial bump...go public at $15 and rise to $17. That situation evidences a much healthier supply/demand dynamic.
A reverse greenshoe option is used to support the share price in case demand for the stock turns out to be lighter than expected. The provision allows the underwriters of the offering (the people running the IPO) to sell shares back to the company. Basically, they can take shares off the market and send them back to the company. The lower supply makes the existing float more valuable (because there are fewer shares to go around), supporting the stock price.
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Finance: What is a managing underwriter,...1 Views
finance a la shmoop what is a managing underwriter
and what is the selling group well the managing underwriter isn't just a person
it's a group and it's very different from this guy the managing Undertaker [Gravestones appear]
after that Ebola outbreak well the key word here is managing in
that the manager is the backstop the fiduciary the risk taker the one who
loses his shirt should the offering go awry in a way that can be proven in a [Hoover sucks shirt off man]
court of law with 12 angry jurors that it was the
evil banks fault specifically the managing underwriter is
the QB in a securities offering such that the company designates this group
as their primary point of contact in selling a chunk of themselves or raising
debt from the kindly loving mutual and hedge fund investors on Wall Street at [Person holding cup on Wall Street]
issue is risk when an underwriting happens usually for a few brief moments
in time the managing underwriter actually owns the shares that it's [Pile of stocks appear]
offering to the public or whoever's buying them it buys them at some
discount from the company you know something like oh no 24 bucks a share
and then turns around and sells them for 25 bucks a share a few minutes later
making a nice living on that dollar spread for 20 million shares that they
just placed well they don't keep all this money there are usually other
underwriters not managing the process involved in the sale of the securities [Underwriters appear]
to the street so they get their piece of the offering this other group is called
the selling group and they essentially work under the direction of the managing
underwriter and serve a very simple but important role in getting early [Cash transfers to selling group]
commitments for mutual and hedge funds to buy a given volume at a given price
at a given level of certainty you know all else being equal think of the
selling group as a gaggle of ex cheerleaders and football quarterbacks [Cheerleaders and football players appear on a field]
who were a hundred SAT points smarter than the average realtor they just get
their selling commission and they don't split anything off the top in the way
the managing underwriter does and a typical set of slits might designate the
managing underwriter is getting 15% of the gross sales of the offering off the
top before anyone else gets anything in this case the managing underwriter would
get in a 15% of that 20 million-dollar spread or 3 million bucks and more or
less just for showing up they might then get
third piece of the remaining 85% or 17 million bucks to sell that than to the [Piechart appears for gross sales]
street and that five or six million dollars generally goes directly to their
sales force in return for winning the hundred-meter client ass-kissing at the [Men running on a track]
annual buy-side fair keeping good relationships with buyers is oddly an
entire career in Wall Street today purposely missed putts on the golf [Golfer putting a ball]
course aggressive fawning about their butt hair
looking hair transplants that make the portfolio manager truly look 21 again [Guys look at man with hair transplant]
and other officious acts while they're all part of this lucrative sales job on
Wall Street and it's a great gig if you have thick skin and you know very [Elephant in a field]
puckery lips
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