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Comment by far33d | Hacker News Reader

If they underprice the offering, the price will go up a LOT during public trading on the first day, hence, high actual price for everyday investors and a big payout for the IBankers.

So what I'm saying is, if I can get in at a reasonable valuation, I'm in. If not, I might wait it out til the hype wears down a bit.

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OK, I see what you mean now -- I assumed this was a typo.

I'm still not sure that I agree. I don't think that recent history has shown that the opening price (i.e. the first price at which the public can buy shares) is any higher if the ibankers significantly underprice the stock. In essence, all that should matter to you is that opening price. If it is too high, then you shouldn't buy.

If the stock is underpriced, then it is true that there will be less capital that goes into the business so the valuation you use to decide whether to make the investment would have to take that into account. Given the way that I'm guessing that Facebook will be valued, I have to think that any possible loss due to underpricing will be vanishingly small compared to the overall market cap of the company.

I can understand a philosophical reason not to invest if it is underpriced, but not a real economic one.

One other note -- if the IPO is underpriced, the payout goes not directly to the ibankers but rather to the people that get allocations. These are usually big customers like hedge funds or other people with an "in" with the ibankers (e.g. execs of other companies that might go public, although this stuff has slowed down). Obviously the expectation is that these people will benefit the bankers in the long run, but the payment is not direct.

'If they underprice the offering, the price will go up a LOT during public trading on the first day, hence, high actual price for everyday investors and a big payout for the IBankers."

False. Investment Bankers get paid a percentage of the offering price. If the price is lower, they make less money.

Their cronies (and often the bankers themselves) take large amounts of the IPO shares.

So when you refer to 'ibankers' as a group, you mean 'ibankers who steal from their employers'? Isn't this a distinction you ought to make? And doesn't your previous statement make sense if you were merely uninformed?

I might be uninformed here, but don't the underwriters of public share offerings often also hold on to blocks of shares after the offering (completely legally)?

They only do that if they can't sell the stock. The point of underwriting is to sell all of the shares as quickly as possible. If your argument is true, it's not just a reason to avoid cheap stocks -- it also obligates you to avoid deals of any sort, since exactly the same inefficiencies exist.

I see. So an underpriced offering actually avoids the underwriters holding the stock- since there is obviously demand. I was under the impression that during the dot-com boom, a lot of the underwriter banking organizations were buying their own underwritten shares at IPO prices and benefiting from the early upswings (basically, arbitraging the lower offer prices).

They certainly do distribute it to favored clients if it's a hot IPO, but they have to balance the needs of clients and issuers: from what I've heard, that meant that you could only get in on a good IPO if you also bought into some less exciting ones. It's not like an investment bank can consistently screw one kind of customer without driving that kind of customer to another bank.

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