IPO – Initial “Pricey” Offering; out of reach for small/mid-sized companies

When a company decides to conduct an Initial Public Offering (IPO) of stock, it is not making a cheap decision. The steps in the process, once the decision is made, cost money.

The underwriters are primarily involved with compliance issues, structuring the deal and pricing the new shares and later attempting to sell the stock. They get paid for this by getting a percentage, typically 8%-9% of the offering price.

Itʼs big money too.

Buckhorn Capital Investment reported in September, “the securities industry earned just under $6.6 billion in underwriting fees for both debt and equity.”

Thatʼs money that did not go to business operations through the IPO.

Add to this fact, the underwriting business is largely controlled by 10 firms. Merrill Lynch, Goldman Sachs and Lehman Brothers are the lead players.

IPO underwriter commissions and profits are therefore concentrated into a very few hands.

Investment bankers and underwriters can be the same. In the cases where they are identical, the profits go up even more and the income going directly to the IPO company is further reduced.

Consider the recent Facebook IPO as an example of how investment bankers can quickly make a ton of money on an IPO.

The Wall Street Journal reported on May 23, 2012 “Morgan Stanley and other underwriters have made a profit of about $100 million stabilizing Facebook Inc. stock since trading began on Friday, people familiar with the matter said.” The article further stated, “The bank would receive the money on top of millions of dollars in IPO fees, the people added.”

Because of the regulations involving an IPO and getting registered with a stock exchange, most companies hire attorneys. These firms have extensive experience in securities law and most are nearly as old as the New York Stock Exchange if not older.

Going right back to the Facebook IPO, Find Law reported on May 21, the social media paid $2.6 million to the law firm of Fenwick & West’s Silicon Valley office.

With each trade before an IPO stock reaches the public, the price has typically gone up to allow the seller to make a profit. This means the big investment banks and their giant-wallet institutional investors have bought the stock and sold it for a profit.

When the average person is able to buy the stock, they still have to go through a broker. Even trading only with very small trading fees can add up to serious money.

Again, more money that does not go into the coffers of the IPO business.

By the time the stock finally reaches the general public, the amount of money diverted from the IPO company into the hands of banks, traders and underwriters can be staggering, as much as 30 percent or more.

Putting a real value on those numbers, if an IPO sold stock worth $1,000 by the time the public could buy stock, the company would only have $700. In this case, $300 is a significant amount.

Ilan Moscovitz, senior analyst for the Motley Fool, reported the average markup in IPO stock from 1990 to 2009 was 22 percent amounting to $124 billion.

Think about what could happen if a company issued IPO stock direct to the public without any middlemen. In the first place, the company would get 100 percent of the money from investors. No commissions, no extra fees, no discounts. RThe company would get the money is needed.

Secondly, investors would pay the true value of the stock and not have to worry about add ons, fees and exorbitant commissions. Thirdly, the stranglehold the SEC and a handful of giant financial institutions have over the world of stocks and trading would be broken.

This would level the playing field in a true capitalistic form. There would be less government interference and far more “free market” rules governing the price of stocks.

9 thoughts on “IPO – Initial “Pricey” Offering; out of reach for small/mid-sized companies

  1. You also have to consider the stocks that will be issued to the executives of these publicly traded companies and we all know they’re not paying the full price per share. They’ve already signed a deal before working for the company that at certain time and for certain number of shares, they’ll buy at a certain rate that is always lower than the actual market value. When they receive their hundreds of thousands of shares, they dilute the value of the stock but no one notices the small fluctuation in the graph, when in fact in monetary term is very significant. At the end of the day, the public trading these stocks are trying to make money with stocks that are constantly being diluted by unethical, but technically legal insider trading.

  2. I’ve lived abroad in several different countries in the past because of the nature of my job and one thing that I noticed was that our country is the only country in the world that makes the buying and selling process of basically everything astronomically expensive. The reason behind that are the commercial banks and the investment banks. They have a hand in pretty much everything that goes on in our country, so they make sure they get a cut in every transactions and that means we pay more for everything.

  3. After reading this all I could do is laugh and realize how much of an uphill battle we’re fighting every day just stay afloat, while the mega corporations and especially the banking institutions make insane amount of money doing essentially nothing. The system is flawed… it is seriously flawed.

  4. Buying direct? Although it would be the most ideal situation to happen, will it ever happen? I think we all know the answer to that. Think about it, people do some horrible things for few hundred dollars, so when you have billions of dollars on the line, chances are the people who are getting those billions will not let go of it so easily. Besides, they have their lobbyists to take care of business for them in Washington anyways.

  5. It doesn’t even surprise me anymore, I think we’re number one in wealth disparity around the world, we think we’re not a 3rd world nation but we really are. The number one economy in the world is for the wealthy and the powerful to reap the benefits from and the average citizens are just there to clean the streets, sell hamburgers, and buy iphones with the little they earn. Initial ‘pricey’ offering it is LOL and the American dream is now truly a dream, just a dream.

  6. Securities law is very technical and highly specialized. It’s today’s litigious environment it is absolutely necessary to hire good law firms to insure compliance. The risks of trying to take short-cuts in this area can be disastrous for a fledgling company down the road. Just trying to keep things real!

  7. Why not let the country control us all, by the way we spend our money, than we can end up as their slaves. By the way things are going I would not be suprized that we are ending up that way.

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