But don't banks compete for the IPO business by telling the company what a high price they will list it for? That doesn't solve the problem of a bank saying they'll list for a high price, winning the bid, and then coming back later and saying that intervening events cause them to think it should be listed lower.
But presumably companies that are about to IPO have advisors/lawyers who can see these sorts of shenanigans coming and fight against them?
It's not always the case that all of the shares are sold in the IPO. Some are allocated to board members and investors. Those people will negotiate a share count based on the IPO price. I may feel entitled to 5% of the company, they may offer 3%, but might only be able to negotiate 4%. But if the shares will double in value after the pop? I'm perfectly fine with that. I know that. I expect that.
There's an incentive for me to fight for shares as if there is no pop, but then agree to the IPO term sheet knowing that there will be.
Because in almost all countries politicians have been bought off one way or the other by banks.
This is why dilution happens too - new shares are created so that they can be sold.
You're correct that the whole company "goes public" at the same time. But that just means it becomes legal to sell shares to small investors, and the company becomes subject to the reporting requirements, etc. The previous owners still typically own most of the shares, and (almost always) are forbidden to sell them for around 6 months after the IPO.
[0] https://www.nytimes.com/2020/12/09/business/airbnb-ipo-price...
The story as it goes is that they need big investors to soak up a lot of the IPO so that they all sell. The brokerages cultivate a set of people who can pony up that money, and part of that cultivation is a history of good (profitable) interactions.
Thinking Fast and Slow asserts that humans use a different weighting system for upside and downside (making $10 does not feel as good as losing $10 feels bad), but it also asserts that people who look at finances and statistics for a living have a bunch less pronounced bias in this respect.
In the same way that it's worth some guy's time to climb into my tree for $250 bucks, and worth $250 to me to not have to make that climb, the investment houses should be profiting off of the difference between my speculative sense of risk in the situation versus their objective sense of risk based on expertise.
But that doesn't seem to be what happens with IPOs. It feels more like an Old Boys' Club, full of people who are as averse to loss as I am, maybe even moreso, demanding an experience that ranges from good to fantastical, instead of fair to excellent.
The good news is, that gap means there's space for competition. The bad news is that many of the people who might participate seem to be more motivated to stretch enough to get an invite to The Club instead. Someone is going to have to defect. A lot of someones...
No, the banks get underwriting fees as a % of the offer, so they are incented for a higher price as well.
The 'winners' are the folks who get to buy from the underwriting bank and that's opaque: it could be 'the same banks clients', and so they get some major favour points for those allocations, and their own private wealth managers would ostensibly get a cut, but that's quasi insider stuff.
The banks 'working with the IPO company' lose money with a price that's too low.
Even if you were to say 'oh, the other parts of the banks are working for some action' the answer to that is, well, bankers are 'very me first' and I don't care who it is, the underwriting team wants to make as much money as they can, it's their personal bonus, and they're going to maximize the price. They don't care about the 'private wealth management teams' bonuses, they care about their own.
AirBnB I guarantee literally had some of the world's best bankers on the case.
There's just a lot of variation in very frothy markets and it's hard to estimate demand from far flung corners.
What is the counter balance to this? Obviously banks can value a share at abnormally high prices and take a big fee, but clearly that is not happening.
The umderwriters are the one's actually putting money up 'ahead of time' at the 'specific price' for the company, which involves some risk obviously.
So if the underwriters price too high, they are stuck with shares.
The people to first buy shares from the underwriteres are likely other institutional investors, and then large private wealth clients etc..
Understand that this is likely one source of the 'jump' - large institutional investors are not generally buying to flip the stock on the same day, in fact, the underwriters (and even AirBnB) don't want that. They don't want volatility.
Ideally, AirBnB sells to the bank/underwriters, the big funds buy from the underwriting bank and then hold. All of this will have been established/prepared for during the roadshow. AirBnB is huge, Fidelity wants a cut, so they'll take an allocation X shares for $Y on 'the day'.
Nice, clean, straightforward, not a lot of volatility.
Going an 'IPO' is like 'being born' - it's a sensitive time and a lot of money is changing hands you want it to go 'as planned' and 'smoothly'.
So there's likely a smaller number of shares really floating out there on day 1, which may enhance the pressure from the demand curve.
That being said, seemingly-paradoxically, despite big pops being bad for the companies, they're actually typically good for employees. RSUs will typically turn into shares at IPO time and the entire bundle of shares will be taxed as income according to the listing price; a giant pop means you get higher dollar value shares while paying less tax, assuming you then hold onto them for a year and pay long-term capital gains tax on the difference between listing and pop price rather than selling immediately and paying short-term tax. Waiting a year to sell isn't that unlikely, since employees often aren't even allowed to sell at all for the first six months.
I’m just trying to offer some explanation, I still believe the process deserves modernization.
If IPO pop was something nefarious, how do you explain IPO pop of Goldman Sachs stock? They ran their own IPO and you can be sure as hell that partners didn't want to leave any money on the table.
In general, IPO pop is an interesting phenomenon and it's not fully explained in the literature.
Yes, in an ideal world you "price it right" and on IPO day the stock doesnt move up or down from the opening price.
Optically, it looks a lot better to price low and have the stock rise.
Additionally, there is something called an over-allotment option (aka greenshoe) that allows banks to sell more shares than initially allotted, to help stabilize the IPO price. This is usually more $ for the banks.
The optimal return for partners probably is giving the institutional investors a pop on even your own IPO so you keep them as investors for future IPOs where you are collecting fees. When the institutional investors lose money on an IPO, are they going to come back to you for the next one?
From what I understand, supply is constrained as employees typically can't sell shares, and retail investors who were lucky enough to get in on the action are typically locked up for 60 days. Institutional investors are happy to hold on to alot of their shares because they can mark them to market and make their returns look great.
Edit: clarified first paragraph
Now if they were thinking rationally they'd realize the extra funds raised from a high IPO price are worth much more than the positive media coverage from a pop, but we all know that people response irrationally to media coverage.
(I don't know how it works, I'm actually asking)
In a direct listing employees can sell on day 1, since there are no obligations to underwriters.