Bad article, but the "you weren't invited" part is correct:
"Consider that the very hot IPO’, such as Facebook, are purchased by the underwriters before the public has even gotten a chance to get in. Underwriters are the big banks such as Goldman Sachs, Morgan Stanley, etc., and the shares they purchase go to their best clients first. This includes hedge funds, large institutions and huge money managers, not the majority of individual investors. "
"After the opening day, when the stock goes public and begins trading, most average investors can go in and buy shares at the trading price. But the opening day “pop” is over, and that is where the money is at, before the general public has had a chance."
(from http://finance.yahoo.com/news/facebook-ipo-etfs-180025693.ht... )
Unlike google's IPO which was a dutch auction, if the general public wants to make good money in facebook's IPO, they're out of luck.
Can you comment on why more companies do not IPO using dutch auctions? Is it more complex/riskier for the company, than the traditional IPO model? Since its my assumption, an auction will get the company a fairer value for their stock.
The issue with dutch auctions is that, unless you ask for a miniscule amount of money, the major investors in the IPO will drive down the price (call it collusion).
The game that wall street plays with regards to IPO is simple: I'll let you buy in most of your shares at 10 dollars if you will buy a few shares at 20 dollars when the IPO opens. This way, the average price is much closer to 10 dollars, yet it convinces others to participate in the IPO trade.
As far as the companies are concerned, the runners ensure that there is institutional demand before the IPO goes public, to ensure that the company can actually sell the requested number of shares. It's much easier to follow Wall Street's rules (and leverage their capital relationships) than to stake out on your own (essentially what google did).
In retrospect, Google the firm paid dearly, as was evidenced by the resulting price rise.
Thanks for the insightful explanation, though I am wondering about the practice of creating the artificial "pop" when IPO opens, why is this kind of premeditated pumping allowed?
The large institutional investors will not participate unless there is something for them. There's a lot of shadiness all around, but essentially you are asking funds to sink tens or hundreds of millions of dollars into a new company which may be very risky. As a result, the baked-in pop gives those investors some assurance that they won't lose their shirts.
At the end of the day, the company needs to receive cash from somewhere and the banks don't want to carry the risk, so they offload it to their customers (who front the cash), and they essentially offload it to the public.
Pretty much. I when to school with the son of a founder of a large tech company. He's off on a business school track now. Over the past summer, we caught up and talked Facebook IPO for a bit. Basically, Goldman Sachs has it all wrapped up. If you've got a big name (like his dad), you could probably get in on the action. If you happen to know a big name, you might be able to get in on the action. For someone 3rd degree like me? Nope.
"Consider that the very hot IPO’, such as Facebook, are purchased by the underwriters before the public has even gotten a chance to get in. Underwriters are the big banks such as Goldman Sachs, Morgan Stanley, etc., and the shares they purchase go to their best clients first. This includes hedge funds, large institutions and huge money managers, not the majority of individual investors. "
"After the opening day, when the stock goes public and begins trading, most average investors can go in and buy shares at the trading price. But the opening day “pop” is over, and that is where the money is at, before the general public has had a chance." (from http://finance.yahoo.com/news/facebook-ipo-etfs-180025693.ht... )
Unlike google's IPO which was a dutch auction, if the general public wants to make good money in facebook's IPO, they're out of luck.