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The undrewriters don't always come out doing so well. Take a look at the Facebbok IPO as an example. They didn't end up selling all of the stock that was issued in the IPO and had to buy up stock back from the market at elevated prices in order to keep the stock from plummeting on the first day. They still made money but not what they expected.

As for the insider vs outsider. In order to issue an IPO, a number of stocks are agreed to be issued. These stock either come from the company issuing more shares and diluting the value to current stock holders and the company receives the money from the new share purchase, or the stock holders offer up some of their stock to be sold in which case they receive the money. I believe is usually mix of the two. The current stock holders don't offer all of their shares up. Just enough (I believe this is set by the SEC) to enter the market.

The underwriter assumes a large risk and for the portion of the stock that goes through them to market, they are paid the $20 difference ($26 to $46). As well they facilitate the actual sale of the shares. This is not an easy task (again see the technical issues with the Facebook IPO).

So in the end the 11 rounds of investors get $26 for some of their shares, in order for the rest of them to be worth $46 or now $50. They are also now allowed to sell those remaining shares on the open market. Something they were not able to do before the IPO.

No one is getting screwed here. There is a very big pie, and everyone, from the first investor to the undrewriter, gets a piece.

I believe that usually the underwrites have buyers for all the stock prior to the IPO. The only reason they intervene to keep a stock from plummeting is to secure their own profits as they usually get options on the stock as part of the IPO deal. Talk about conflict of interest. Obviously a lot of the buyers are funds managed by other investment banks. Again talk about conflict of interest. What was the story the other day, that GS didn't record a single day of trading loss for an entire year...

That said, most of the money still does end up in the company which can use it to build its business. The process isn't completely broken. But it's very inefficient.

>The undrewriters don't always come out doing so well. Take a look at the Facebbok IPO as an example. They didn't end up selling all of the stock that was issued in the IPO and had to buy up stock back from the market at elevated prices in order to keep the stock from plummeting on the first day. They still made money but not what they expected.

If they still made money, what's the risk? I don't consider "X chance of making 100% return, (100-X) chance of making 10% return" to be much of a risk.

Then when you have a company, don't IPO. Then you don't have to give anything up to underwriters.

One comment... Google and Facebook each tried to stick it to the bankers in their own ways. In the end both struggled as a result. Google tried to cut out bankers and make them play by special "Just for the Google IPO" rules and rates. By creating a custom-IPO process, they saved on banker fees but wound up leaving an awful lot of money on the table.

Facebook went the other way. They tried to grab every last penny on the table. Their stock underperformed post-IPO which isn't good either.

You can put Twitter in an overreaction the other way - they didn't want to leave money on the table (raising the shares to 26) but didn't want to be too greedy either.

The bankers get paid to line up supply and demand. They may be helped by being an oligopoly, but right now the market isn't set up to cut them out of the loop.

Help me understand why Facebook taking every dollar out of the market was a bad thing for them. I understand why Wall Street wasn't happy about it (since they expected a pop they could profit from & had to buy stock to fulfill their obligations... and why should taking a company public be an entirely risk-free profit opportunity anyway?)

But, why was it bad for Facebook? Sure, their stock was below the IPO value for almost a year, but employees almost certainly had their options priced well below the IPO price, right? What other ways can a slightly lowered stock price hurt a company in the year after an IPO? Genuinely curious about this.

I saw a few intelligent commentaries about this who agreed it was a great IPO for Facebook. The way I think about it, they floated it like a wet sponge, something you can only do if you are confident and taking the long view.

Not "certainly." We had an IPO where I work in 2012. People hired very recently before the IPO had a strike price near the offering price.

Moreover, there is a mental dynamic when recruiting. A steadily appreciating stock is a helluva recruiting tool.

You're correct in your understanding - the company maximized the price and ended up with a nice chunk of cash in its bank account.

Internally someone starting the week of IPO might have received his stock grant at that week's price might not feel particularly upbeat when the stock price is later cut in half. There's always some churn and renegotiation going on at the companies whose stock price suffers significantly, and that makes it harder to concentrate on execution.

The backlash will come the next time Facebook tries to raise money. That said, the cost is much less than the amount of money that Twitter left on the table.

Also - if every company flopped post-IPO, the IPO market would die. That's not Facebook's immediate problem, and again "doing the right thing" isn't worth leaving $20/share in the hands of flippers.

"Google and Facebook each tried to stick it to the bankers in their own ways."

This is a good example of a situation where you should stay close to what you know and stop thinking you can outsmart people who make a living a certain way everyday and know as much or more than your advisers. And definitely more than "you" (meaning the google guys) who made decisions based on things they read or what they were advised as opposed to having an actual seat of the pants feel for why something is done a certain way. And the pros and cons.

There is a reason, you know, why people cooperate with the "mafia" and pay the vig and play the game. Is it right? No. But stick to what you know and stop thinking you can outsmart others out there who do something for a living and have established procedures and actually do add value in a system that essentially works. So others take their cut.

mathattack is wrong though. Both Google and Facebook improved the amount of money the company got instead of lining the underwriter's pockets with that money.

With all due respect (and I'm wrong a lot!) Google left quite a bit on the table. Their stock price went up 500% from $85 over the next year. Wouldn't they have been better off capturing some of that?

The jury is still out on Facebook. Their IPO could hurt them getting money in the future, but maybe not.

It's not the underwriters who get paid when stocks double, it is the people they allocate the stock to.

By creating a custom-IPO process, they saved on banker fees but wound up leaving an awful lot of money on the table.

Could you elaborate? I thought the dutch auction was a good way to maximize google's share of the pot (by taking money away from well-connected people who received shares at the IPO price). Looking back at historical reports it only "popped" 17% ($100 from offering price of $85) compared to twitter's 73%.

The price went up ~5x from the $85 within the first year. One interpretation is that they had tons of good news. Another is that the initial investors didn't understand the value inside of Google, and perhaps the traditional road show would have helped.

I view the bankers like real estate agents. Many are worthless, but a good real estate agent can raise the price you sell your house for much more than the 6% in fees they charge.

"If Twitter is worth $50 bucks a share why were its investors willing to part with their stock for $26 a share only yesterday?"

http://en.wikipedia.org/wiki/Time_value_of_money http://en.wikipedia.org/wiki/Expected_value

Yes. Yes. That's not the question. The question is why does an insider who is intimately familiar with all the details of the business and has been following it since it started values it so much less than Joe Plumber who is clueless and buying it today on the stock market. If Twitter is such a good business why would I as an owner want to part with it? What is it going to be doing with the cash it raised?

As Warren Buffer says, in the short term the stock market is a beauty contest. So yeah, Twitter is very beautiful today.

The idea behind the stock market is to have a way for businesses to raise money for expansion (other than getting a loan from the bank) and investors buying into the future profit of this expansion. This is capitalism and it's great. It has turned into this casino pumped by easy money with wild up and down swings where any correlation to the soundness of the business, its prospects or performance are purely coincidental.

Market Dynamics.

The "insider" doesn't have to compete with as many people for an ownership share. A small sampling of "insiders" does not efficiently price a security the way an offering to the greater market does.

This idea that capital markets are designed to screw over the little guy is amusing to me to see HERE on THIS WEBSITE of all places.

You act like the market works like Amazon.com where these scary "insiders" list $45 price tags on things. In reality, people are creating BIDS. That's how it works.

I'm not sure what your expectations are of this web site but as far as I can tell we're a bunch of people with different opinions. :-)

To me an IPO is very much a conflict of interest situation with asymmetry of information. There are laws to govern this but there is a huge gray area.

Once a company is public it's a little different...

In my opinion capital markets have been getting more broken in many ways and have been favoring the big guys over the little guys in many ways. I say that as someone who invests in the markets, have benefited from stock options and pretty much seen things from many different angles. In the last 15 years capital markets have failed to deliver the economic growth and the gap between the rich and the poor has widened.

It's not your specific opinion here that amuses me, but that there is certainly an anti-twitter-ipo vibe here. Across several stories. I've been a regular here for 5 years or so and I've seen many IPOs come and go and few have been treated with this level of derision.

You're obviously entitled to your own opinion, and certainly IPOs carry much risk. That "insiders" get made liquid is not, IMO, one of them. Somebody who invested in GOOG on day one would've made over 10x on their money today. Somebody who did the same in ZNGA would not. It's obviously very risky, with potential for commensurate reward.

I'm not sure why you think the markets have "failed to deliver the economic growth" over the last 15 years, or that it's somehow their job to "deliver" economic growth. I think us "little guys" who have invested in the market in that time have done very well on balance.

I'm not one for long back and forths, so feel free to have the last word if you'd like it. I replied initially because I'm very much turned-off by the save-people-from-themselves philosophy.

You quoted Buffet, I'll quote Jesse Livermore: "t was never my thinking that made the big money for me, it always was sitting."

If you think the "little guy" is screwed over by the "big guy", become a buy-and-hold investor. There's little way to be screwed there. Spread your bets out--diversify--and buy and hold. When it comes to trying to time the market or play ER or day trade, you're right, it's hard for a retail investor to make a buck. So buy and hold and let the stock market help you accumulate wealth the way it's done reliably for over a hundred years.

If it is not the job of the capital markets to facilitate economic growth then what are they there for?

facilitate != drive/deliver

Or $18 the day before.

One answer is there are a lot of people who just want to get their billion out. Or million. Or hundred thousand. They are largely undiversified. They are selling to diversified owners who are less impacted by day to day price shocks.

The underwriter take a huge risk in the deal, underwriting means that he sometimes needs to buy the shares from the company (i.e. Twitter here) and Twitter will not need to care if the underwriter get reed off the shares on the market because he got paid first this is a huge risk .

A second point is that the underwriter is paid to keep the shares liquid on the market at least for the first 30 days depending on the contract deal. It means that the underwirter will need to put himself on the buying side or the selling side everytime someone want to buy/sell his shares ... this is a huge risk again just look at the volume of the share deals everyday on the market to see what kind of liquidity the underwriter need to keep ready to play ... I agree with you that this don't create value for the economy out there but it is necessary to keep the wheel rolling ...

Recently I've been thinking about Kickstarter et al as a tech sector replacement for the stock market. What form or function does the stock market lay for companies that can be replaced with a more direct consumer/business to company investment? Is the instability and irrationality that speculation and large investment groups bring to the stock market necessary for funding/investing?

Exactly why would kickstarter be immune from irrationality, instability, or speculation?

On every trade two speculations are made, I don't see how bringing in unsophisticated retail investors would help with regard to price discovery.