Why did Nymex IPO (NMX) underwriters leave so much on the table? It priced higher at $59 but opened at $120?
Merlene asks:
- Wouldnt underwriters want to maximize offer price, as opposed to open price?
- What are the implications for higher offer versus a big pop on trading day?
- Wouldnt underwriters want to maximize offer price, as opposed to open price?
- What are the implications for higher offer versus a big pop on trading day?
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it makes their clients happy.
The underwriters did a very poor job of guaging market interest for the stock. My bet is they had the same underwriters that Google had (which left significantly more on the table than NMX). The goal of an underwriter is to price the shares so that it is traded at even money on opening day. This rarely happens but it is the goal.
The implications are that NMX does not receive as much money as they should have for the initial offering. The basically received 50% of the capital infusion they could have. Or on the flip-side… their are now 2x the number of shares sold than were needed to raise the necessary amount of capital.
These underwriters did a very poor job.
It was the mistake of the underwriters. The same thing seems to have happened with Google. Yahoo posted a story saying there is a drought of new IPOs (For instance the Wilshire 5000 is now about 100 short of 5000 different companies) and major private companies such as Subway are in style. What’s not said is maybe this crop of underwriters suck and so they are waiting for better pricing.
Underwriters underprice their stocks for several reasons:
-Underwriters make their profits off of gross spreads and selling commissions, but even if they underprice, they still make a lot (60% of the gross spread)
-They don’t want to overprice IPOs and get stuck with issues they can’t sell
-Speculative Bubble Hypothesis: Overheated demand leads to the huge (and temporary) jump in prices you see in the first day
The people who make money off of IPOs are the Investment Banks off of gross spreads and commissions, and institutional investors, who on average make a 17% profit in the first day (they buy it at the underpriced value).
The average IPO (20-60 million) loses just over 20% in issuing costs, between the spread and underpricing (with underpricing making up more than half of that).
I am stunned. Could have had some but early reports said would be no big deal. We were wrong.