REf: Explain why IOMG secondary was priced 6 points under Monday's
close. I can't figure it out by myself."
Bill, Since no one explained, I'll take a crack at answering your
questions.
Secondary offerings is basically no different from IPO. The underwriters
's basic objective is to make the IPO company happy, the new
shareholders happy, and make themselves happy. (Everybody
happy happy, basically). So with this objective in mind, they set the
IPO price such that by the end of the day, everyone will be happy happy
(except perhaps some speculators and momentum chasers). In the
case of secondary offering, they will also try to make existing
shareholders not too unhappy (never a good experience).
The worst things that can happen in an IPO are 1) all shares not sold
out immediately, and 2) share price drops substantially on IPO day or
soon after. Underwriters got a reputation and a very lucrative business
to protect, and if their clients aren't happy - they won't get too many
new IPO/secondary contracts.
In nearly all cases, the underwriters 's clients are the IPO company and
the institutional investors and brokerages. The bulk of IPO shares
are usually sold to institutional investors before the actual IPO during
road shows. This is done to guarantee a sellout as well as for efficiency
and cost. Millions of shares can be sold to a handful of institutions vs.
tens of thousands of individual investors. A lot less paper work and
transactional costs, and predictable outcome.
For these reasons, the underwriters always priced IPO and secondaries
below the perceived current value of the stock. Not too low and make
the IPO company unhappy, and not too high to make the institutional
investors unhappy.
In IOMG 's case, I think H&Q and JPM did it just right. Everybody is
happy except the shorts. |
