Talk:Initial public offering
|Initial public offering was a Social sciences and society good articles nominee, but did not meet the good article criteria at the time. There are suggestions below for improving the article. Once these issues have been addressed, the article can be renominated. Editors may also seek a reassessment of the decision if they believe there was a mistake.|
|WikiProject Finance||(Rated B-class, High-importance)|
|WikiProject Investment||(Rated B-class, High-importance)|
What deterines the IPO price of a company considering going pubic? Many factors including valuation, market conditions and investor sentiment. See Ritter & Welch (2000) for a broad survey overview.
The description of the auction method on the article page is flawed and incomplete. It would be wise for you to do research before posting seemingly-factual information.
Seconding this. May edit to include basic principles only.
- 1 not a good explanation
- 2 SEC filings
- 3 A reverse IPO
- 4 IPO definitions reqd
- 5 Conflict of Interest
- 6 Issuance of Common Stock
- 7 References, Inline Citations, and all that
- 8 The Lock-Up Period
- 9 Copy-paste from external source
- 10 Not Neutral Point of View?
- 11 how much Investment banks charge for IPOs
- 12 Why was war59312's edits removed?
- 13 The ranking of the largest IPOs is INCORRECT
- 14 Access to IPO Shares
- 15 Need for additional references
- 16 GA Review
- 17 Corruption
not a good explanation
the article seems most focused on certain technical details instead of a more general explanation
most people come to this article because they dont know anything about investing
I recently filled in some details on the greenshoe option often used in public offerings and believe that a link to that wiki entry would be appropriate in this section, so I intend to make an entry here with a link. I also think I might be able to add some more informative detail to this entry directly. Duedilly 04:38, 30 September 2006 (UTC) barry deegan rules ha ha ha
I think mentioning which SEC filings are involved with IPOs is important. The S-1 filing contains all the information anyone could want regarding company information, share distribution/amounts/pricing, risk factors, and other information. It was deleted by a moderator when added to links, so should I add this as a new section, or is it not important enough?
A reverse IPO
can someone please put some explantion on a "reverse IPO" in this article? Jackzhp 19:39, 20 April 2007 (UTC)
There is really no such thing as a "reverse IPO." You may be referring to a "reverse merger" but that shouldn't be called a "reverse IPO". In a reverse merger, a private company merges into a publicly traded shell and there is not necessarily an "initial" or even a "public offering" of shares. It's just a merger. --Jarbdpo 09:15, 25 February 2011 (UTC)
- Agreed. The phrase "reverse IPO" isn't meaningful, nor is it a consistently used term. As Jarbdpo said, it may refer to a "reverse merger", which is not a "reverse IPO". Another situation which could be considered a "reverse IPO" is an employee buy-back of all shares of a publicly traded company's stock. There are probably many other instances, none of them appropriate for being called a "reverse IPO" than others. Let's get the article as is, an IPO proper, cleaned up and complete, then consider whether to refer to variations, perhaps as a separate but linked page in "See also" section. --FeralOink (talk) 04:08, 28 June 2012 (UTC)
IPO definitions reqd
Can anyone explain what the following terms mean?
post issue capital
cut- off price
Here is a paragraph for reference:
The issue is priced at 11.90x FY07 E (HY 07 annualized) earnings on post issue capital at floor price and at 13.84x at cap price. The comparable peer is trading at a P/E of 36.31x with an EPS of Rs 41.44 (FY 07).
We recommend the investors to subscribe at the cut- off.
Thanks in advance,
Prasadpkamath 08:59, 4 May 2007 (UTC)
post issue capital
The capitalization after the offering. If the company had 1mm shares outstanding prior to the offering and was selling another million in the offering, investors are interested on per share numbers post-offering, as that would be the number tha applies to the shares they are considering buying in the offering.
In the context of your paragraph these seem to relate to the minimum and maximum likely price, per share, of the offering
Price-earnings ratio P/E ratio
cut- off price I'm not sure from the context what is meant by this.
--Conant Webb 19:22, 8 August 2007 (UTC)
Conflict of Interest
- What's even more irritating is that this user didn't even inline cite and I don't particularly wish to read through all that to find out where the references are. The articles do look legit and reasonably scholarly though. --Meowist 17:19, 1 September 2007 (UTC)
Issuance of Common Stock
Will Only Common Stock be issued for first sale in case of an IPO or non-equity also will be issued??
- It could be anything, but most frequently is common stock --Conant Webb 19:23, 8 August 2007 (UTC)
- Yes, Conant Webb is correct that an IPO is usually common stock. And also that it could be other securities too, one of which is preferred stock. Preferred stock is something of a hybrid, and could be considered non-equity or equity depending on terms. Convertible bonds, stock warrants and maybe even (liquidation) preference shares could be part of an IPO. All are, to some degree, non-equity. This could be mentioned in the article once the fundamental sections are improved, or as a new section if adequately researched and cited. --FeralOink (talk) 04:20, 28 June 2012 (UTC)
References, Inline Citations, and all that
I've added the first(!) inline citation to this article while clearing up the quiet period confusion (yes, there are two of them and no, the former still exists). I hope people will follow the trend and add more inline citations and, in so doing, clear out the rubbish references sections at the end of every section as well. For an article that, no doubt, gets ridiculously many page hits, it really, really ought to be inline cited. --Meowist 18:05, 1 September 2007 (UTC)
The Lock-Up Period
If you look at the charts following many IPOs, you'll notice that after a few months the stock takes a steep downturn. This is often because of the lock-up period.
When a company goes public, the underwriters make company officials and employees sign a lock-up agreement. Lock-up agreements are legally binding contracts between the underwriters and insiders of the company, prohibiting them from selling any shares of stock for a specified period of time. The period can range anywhere from three to 24 months. Ninety days is the minimum period stated under Rule 144 (SEC law) but the lock-up specified by the underwriters can last much longer. The problem is, when lockups expire all the insiders are permitted to sell their stock. The result is a rush of people trying to sell their stock to realize their profit. This excess supply can put severe downward pressure on the stock price. —Preceding unsigned comment added by 22.214.171.124 (talk) 10:41, 20 February 2009 (UTC)
Copy-paste from external source
Thought it was worth noting that the last paragraph in the introduction was lifted from Investopedia: http://www.investopedia.com/terms/i/ipo.asp - it should at least be quoted with a reference. --Scumble (talk) 11:24, 8 April 2010 (UTC)
Not Neutral Point of View?
The first section has a list of benefits of being a public company, but no list of disadvantages. I am no expert but I can't imagine that there are no disadvantages. It makes the section read like a pep talk or a brochure or something, but not like an encyclopedia article. Omgoleus (talk) 21:39, 21 May 2010 (UTC)
I will add the disadvantages. --Jarbdpo 09:16, 25 February 2011 (UTC)
Those provided are appreciated but isn't this the exact point in which the company is now all but required to generate as much profit as it can with cost/benefit and risk/reward (obviously legal implications) analysis? Am I alone in thinking this is why we have the problem we have in the United States with corporations running government and driving our financial system into the ground without the ability to stop? Seems to me that when you have enough of these "people", created by money and whose only purpose is to generate money, all changing policy so they can more effectively make money, we have imminent disaster.
Hello Inventive Exile, be sure to sign your comments in the Talk section with four ~. Now to answer your question. Some companies that go public are not under any immediate pressure to produce profits. Junior pharmaceutical companies in clinical trials, and early stage mining companies come to mind as two examples. In those cases, the money raised from the IPO will advance them along their timeline, but they will probably have to raise additional capital before (and if) they achieve commercial production. But, yes, most corporations do have a strong incentive to produce profits. You see this as wrong? Where would the capital come from, to do research, to explore for resources, to produce the goods that we consume, if investors were not offered the possibility of a profit? In a system where the means of production is held by all, the funds would come from the State. In our system, the funds come from the private sector. Most investors will not put their capital at risk without the possibilty of a reward. The "imminent disaster" you fear would surely come about if the profit incentive is removed from the equation. Gulbenk (talk) 22:29, 10 November 2012 (UTC)
how much Investment banks charge for IPOs
Hi. I think it would be a good idea to include here how much investment banks charge on average for IPOs. I heard the average is about 3%, although I might be mistaken. Can someone confirm this and include this information into the article? --M.efimov (talk) 09:58, 7 September 2010 (UTC)
Investment banks charge more than 3% of the amount raised. As a former partner of a large independently owned investment banking firm, we charged 6% to 10% of the capital raised, reimbursement of all fees/expenses (usually another 2% to 3% of the capital raised) plus a broker warrant equivalent to 10% of the stock issued. For example, if the financing was to raise $10 million by selling 1 million shares at $10 per share, we would generally earn $800,000 in commissions, $200,000 in expense reimbursements and obtain a warrant to purchase 100,000 shares (10% of the deal size) at $10 per share (the deal price). --Jarbdpo 09:15, 25 February 2011 (UTC)
- Jarbdpo, what do you mean when you say that you were a former partner of a large "independently owned" investment bank? The only large investment bank that I know of that is a partnership (or was) is Goldman Sachs. In that case, it was owned by the partners. It is a "privately owned" investment bank. I'm not saying there is anything wrong with being privately owned n this context, but how is "independent", and of whom? If not a partnership, maybe you were a partner (and are no longer for this reason), was ownership status of this firm changed perhaps? If so, to what, such that it became "independent", and of whom? G.E. Capital is an example of a "dependent" I-bank if one considers it as a unit of G.E. Or it could be considered "independent" because it is not a Wall St. I-bank. But it doesn't have partners. This is why I'm curious, not merely to snark about your terminology, nor challenge the veracity of your comment about fees. Although the latter is interesting, sounds high, maybe not, should be verifiable, and would be nice to include in this article! --FeralOink (talk) 07:01, 30 June 2012 (UTC)
Why was war59312's edits removed?
The ranking of the largest IPOs is INCORRECT
First, Petrobras's $70 billion capital raised was not in form of IPO (Petrobras was listed in the exchange long ago.)
Second, please check whether the size of GM's IPO is correct. From "Global IPO report 2011" by Earnst & Young, the size of that issue should be $18.1 billion.
Therefore, the largest three IPOs should be Agricultural Bank of China, Industrial and Commercial Bank of China and AIA Group.
- This is incorrect. Or rather, it is not consistent with the sourced references in the article. Based on that, General Motors IPO IS the largest IPO in history at $23 billion. A reference to the Ernst & Young document mentioned is necessary. Until such is provided, I am reverting the content of the article BACK to what it was, in order that it be consistent with the sources referenced, which were Bloomberg and the Wall Street Journal. The article should not have been changed without providing the revised references as well, as it is VERY confusing as it is now.
- And yes, you are correct regarding Petrobras, as that was not an IPO. Similarly, Burger King's recent (June 2012) public listing on the NYSE was not its I.P.O., as that occurred in 2006, but was through sales of securities to the public but not common equity listed on an exchange. Once the article is in better condition, it may be useful to mention that, not Burger King in particular, but the fact that "going public" versus doing an IPO of common stock listed on an exchange, are not necessarily equivalent. --FeralOink (talk) 07:14, 30 June 2012 (UTC)
Would it be useful to include a discussion of who gets access to IPO shares, and the bias of the underwriting process against smaller, non-institutional investors? — Preceding unsigned comment added by 126.96.36.199 (talk) 03:01, 13 January 2012 (UTC)
- Yes! It would! Thank you. I will try to address that. Good point! --FeralOink (talk) 07:15, 30 June 2012 (UTC)
Need for additional references
I have been been working on this article in an attempt to organize and expand a few of the sections. However, many of the statements remain unsupported, and so need additional references. Gulbenk (talk) 04:52, 12 July 2012 (UTC)
- This review is transcluded from Talk:Initial public offering/GA1. The edit link for this section can be used to add comments to the review.
I really don't like to quickly fail any nomination but unfortunately this is a similar case. The article is fairly big but with only 26 refs; nothing wrong with the number but large amount of facts are not sourced. Many paras are completely unsourced. In fact, many sections are entirely unsourced. The refs used need to be formatted properly. The article is tagged with one issue but it needs many tags such as refimprove, OR etc. I'm sorry to say but this article is far away from GA and thus, this has to be a quick fail. The issues cannot be addressed in 3 or 4 months so, have to fail. Good work is done on the article but not enough as each and every fact in the article should have sources which are well formatted. I'm not digging in any further and just failing it mainly due to lack of refs which are needed for verification of the material. Thank you. TheSpecialUser TSU 14:55, 23 October 2012 (UTC)
I think the findings in http://www.nytimes.com/2013/03/10/opinion/sunday/nocera-rigging-the-ipo-game.html should be added to this article. EllenCT (talk) 04:28, 10 March 2013 (UTC)
See also: http://blogs.reuters.com/felix-salmon/2013/03/11/where-banks-really-make-money-on-ipos/ EllenCT (talk) 10:33, 11 March 2013 (UTC)
- I added these. EllenCT (talk) 04:34, 14 March 2013 (UTC)
- I've copied this response from my talk page, pertaining to this removal: EllenCT (talk) 22:15, 29 March 2013 (UTC)
- Hello EllenCT
- I have recently removed a paragraph from Initial Public Offering that you may have worked on, or contributed to. The paragraph contained allegations made by a plaintiff in an ongoing lawsuit, and was supported with a reference to a NYT Op/Ed piece. The allegations were presented as fact, rather than allegations. The Op/Ed piece was presented as fact, rather than as an opinion of the specific author. The author's interpretations of legal documents and securities underwriting activities were presented as fact, without reference to the author's background and knowledge of either the law or corporate finance. No attempt was made within the paragraph to present a balanced presentation of arguments made by both sides of the issue. The paragraph heading was inflammatory, and presumed the truth of Plaintiff's allegations.
- I agree with your concerns and will try to address them. There are a few things I want to mention: Joe Nocera is an experienced Wall Street business reporter whose work for the New York Times has only appeared as a column in the business section's opinion pages for years, but I think it's clear that he considers himself a factual beat reporter for columns such as these when he's reporting from primary sources. The NYT says that they fact-check their op-eds, and while there is plenty of evidence that they don't always do a good job of it, they do issue corrections in such cases. Felix Salmon has been Reuters' Wall Street correspondent for many years, and seemed much less surprised by the revelations in the discovery documents than Nocera (although they led him to retract his recent claim that a 7% IPO fee charged by Goldman Sachs aligns their interests with their customers'), specifically stating towards the end of his piece that the practice is widespread and likely to continue. As to whether they were reporting the plaintiff's specific allegations or directly from the discovery documents, the text of the links above seems clear that both were referring to the documents authored by Goldman. I will look around for other sources and try to rephrase the section by including opposing viewpoints if I can find any, making it clear that the kickback bribery is alleged instead of proven, and attributing statements to the journalists. To the extent that Salmon is correct about the extent of the practice, I think readers would be far better served to have a light shined on it than brushing it under the rug. EllenCT (talk) 22:15, 29 March 2013 (UTC)
- The securities markets were acting with "irrational exuberance" during the dot.com era. What sort of valuation metric does one ethically apply during such times? Should Goldman have marked up their dot.com offerings to irrational levels, to take full advantage of the exuberance? Was their use of more conventional valuation methods an intentional attempt to funnel unjust profits to institutional clients, at the expense of the underwriting client? Or were they compelled to use more rational pricing methodology? Insight into those questions might be gained through one of the simple rules applied to every solicited securities transaction: A broker must have a reasonable basis for making a purchase recommendation. That effectivly prohibits a broker from recommending an irrationally priced security in an irrational market. If a broker is prohibited from recommending the purchase of an irrationally priced security, does it not stand to reason that a brokerage firm might feel ethically or legally prohibited from offering an irrationally priced IPO? In some future litigation, could an underwriter defend selling an institutional client shares of an IPO that was knowingly priced at an irrational level? Might the bet by Lawton Fitt be simply a comment on the frenzy and irrational nature of the marketplace, by one was was compelled to stand apart from that frenzy? It is worth noting that eToys was not compelled to use Goldman in the first place. They could have pursued a uniform price auction, which would have been more effective at price discovery, without the ethical/legal constraints. Gulbenk (talk) 05:57, 30 March 2013 (UTC)
- The issue here is that the brokers have no incentive to take advantage of any support for a reasonable valuation decision, whether based on rational or irrational factors, because they've been shaking down the institutional flippers. That puts their interests, supposedly in a 7% underwriting fee, against the interests of the fundraisers, because the brokers stand to gain much more than 7% if the valuation is low relative to the first few days' trades. Here's Nocera's paragraph which Salmon quoted as the reason he had to retract his earlier assertions on the subject:
- "Goldman carefully calculated the first-day gains reaped by its investment clients. After compiling the numbers in something it called a trade-up report, the Goldman sales force would call on clients, show them how much they had made from Goldman’s I.P.O.’s and demand that they reward Goldman with increased business. It was not unusual for Goldman sales representatives to ask that 30 to 50 percent of the first-day profits be returned to Goldman via commissions, according to depositions given in the case."
- Salmon continues with specific reference to the discovery documents:
- "Some big names jump out from the documents here — none more so than Bob Steel, who was then Goldman’s co-head of equity sales, and who went on to put out financial-crisis fires for Hank Paulson at Treasury before going on to become the CEO of Wachovia. Steel wrote a detailed email to Tim Ferguson, the chief investment strategist at Putnam Investments, saying that he would try to help Putnam out “with regard to IPO allocations”. At the same time, however, he added that “we should be rewarded with additional secondary business for offering access to capital markets product”. Which, in English, means that if Putnam got access to Goldman’s IPOs, it would have to steer more soft-dollar commissions to Goldman.
- "Meanwhile, if you didn’t toe the investment banks’ line, they would cut you. Toby Lenk was the CEO of eToys, and in a 2006 deposition he was asked whether he ever “voiced any displeasure” with Goldman about the fact that they left so much money on the table. He said no — and added “a little story” about why it was never a good idea to annoy a big investment bank...." (The story is worth reading at )
- There is a difference between a broker recommending a security and expecting in no uncertain terms to be repaid from institutions flipping that security. Also, there was no way to know whether a higher IPO valuation for eToys would have been more or less rational than the chosen valuation. They were trying to compete with Amazon when Amazon was much smaller both in sales and market share. Who is to say that the cash from a larger valuation wasn't needed to achieve profitability? EllenCT (talk) 07:08, 30 March 2013 (UTC)
So, there is no way to determine a rational price? Your suggestion that consideration should be given to the amount of cash needed to achieve profitability is more properly applied to the question of whether the IPO is suitable in the first place. Any number of marginal enterprises might be made "profitable" with enough interest-free cash.
In this discussion there has been a breezy disregard for compartmentalization of decision making and the chinese wall at Goldman. The CEO and partners may have viewed the process as one, but the separate profit centers within Goldman would have been incentivized according to their own singular objective, and restrained according to their specific regulatory environment. The only reason the eToys plaintiffs would have for linking the (so called) "kickback" scheme by sales to the pricing of the IPO by underwriting is to construct a larger conspiracy, by Goldman, to defraud the underwriting client (eToys) of a portion of the market value of their stock. Given the vagaries of the marketplace, and the irrational nature of the IPO market during the dot.com era, Plaintiffs would have had a difficult time proving their case if the only argument centered on the methodology of pricing. So they construct a conspiracy out of disparate events. That conspiracy remains unproven, which may relate to why the dicovery documents are under seal. To give some color to the sales side of this story, it would help to understand the process from a broker perspective. A broker who sells shares of an IPO is compensated with a portion of the selling concession (in lieu of a commission). That compensation is denied the broker if the client sells the allocated shares within a certain period of time after the IPO launch. The "penalty bid" is intended to discourage flipping. So a broker gets nothing if the client flips the stock. Under those circumstances, it would be natural for the broker to reference the client's profitable transaction and ask for more business. Brokers ask for more business every day. If there is an admission in the record that a client undertook (unsolicited) transactions that he regarded as pointless, it only proves that the client crafted an inelegant (bordering on hamfisted) response to the broker's legitimate request for more business. It does not prove a "kickback" scheme or a larger company-wide conspiracy.
To clarify, I don't know how Goldman handled their penalty bid during this era. Each firm determines how that is applied. The process outlined is the norm, and while it is likely that Goldman followed the model I cannot be certain.Gulbenk (talk) 04:00, 31 March 2013 (UTC)
- Chiming in with a random third opinion - while I understand there may a concern that the information is a bit scandalous, it's generally much more productive to focus the discussion around specific edits and for the other side to come up with an alternative proposal (similarly, in board meetings debate is always better when there's a motion on the table). Gulbenk said this information deserves to be in the article, so he should propose something. If not, try another edit with some tweaks. In any case, as someone who's been around the securities articles here on Wikipedia more than most (and recently did some major overhauling at investment banking), I strongly approve of this in the article. II | (t - c) 00:20, 2 April 2013 (UTC)
- If one looks at the information as a series of allegations, rather than established facts (or facts without an established correlation), then a separate section under the heading of "Corruption" would be inappropriate. Corruption and conspiracy have not been established. That leaves us with (an undisputed fact): a controversy concerning the pricing of a specific IPO, during the dot.com era. That topic would, I believe, be appropriate to add to the (existing) section Pricing of IPO. One could state the allegations (as allegations) and cite the supporting NYT opinion column (as an opinion of the author/columnist). That should be balanced against excerpts from news articles or columns containing Goldman's position on the issue (if such articles or columns exist), or a reference to Defendant's statements in their answer to Plaintiff's complaint (if that is a public document). But I think that the primary thrust of the paragraph should be that pricing is an inexact art, particularly during periods of market instability, and that can lead to disputes between the underwriters and the client (or the client's creditors). That would be an interesting and meaningful addition to the article. If the dispute is eventually resolved in Plaintiff's favor, and elements of conspiracy and/or kickbacks are proven in court (or through some regulatory action) then a separate section on corruption would be quite appropriate.
- I would defer to EllenCT, who should be accorded the opportunity to write the revised paragraph(s), as the one who first brought this information to the article. Gulbenk (talk) 03:32, 2 April 2013 (UTC)
- Hopefully we can find a source which can put this into the broader perspective of kickbacks in IPOs. Kickbacks have been an integral part of finance for a long time; in real estate, the U.S. has had RESPA for a long time to prevent it. Currently ongoing controversies include collateral protection insurance scandal (see New York's settlement or FHFA's new rules) with lenders in the U.S. or the payment protection insurance scandal in the UK. IPOs would sort of seem to be less susceptible to reverse competition than these cases, but that doesn't mean it isn't a huge part of the business. II | (t - c) 04:21, 2 April 2013 (UTC)
- If the focus is kickbacks, your best bet for information would likely be FINRA. http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p122490.pdf This touches on "spinning", as well. Gulbenk (talk) 05:14, 2 April 2013 (UTC)
- Good job. Take a look at my edits, to see if there is anything you want to alter. I think the term "kickback bribery" is a bit like saying cow animal. So that was shortened to kickback (although FINRA refers to it as two words: kick back). Also, I changed the part where you had the underwriting client (which is the company going public) flipping the stock. That, of course, would be a sales client, likely an institutional investor. Without a counter balancing statement from Goldman, it would be important to state that the suit is ongoing and that the allegations are unproven. That was added to the end of the paragraph. Other than that, just a few minor copyedits. I may, at some later time, add a reference to FINRA rule 5131, under the heading of "Regulations" (or such). Again, good work! Gulbenk (talk) 23:14, 3 April 2013 (UTC)