Why do companies go out of their way to make sure their stock price goes up after IPO?
Pearlie asks:
I mean it will be good for their second public offering, more attractive stock options for the employees, be able to sell more shares of non-outstanding ones, and what else am I missing? Thanks!
I mean it will be good for their second public offering, more attractive stock options for the employees, be able to sell more shares of non-outstanding ones, and what else am I missing? Thanks!
Related questions:
- Why do companies go bankrupt when their stock price drops? Starla asks: If companies only make money from stocks during IPO, why do they go bankrupt when the stock price...
- What if all companies were close to as expensive in price as Berkshire? Emelia asks: I was thinking if nobody had a stock split that would happen more right? Also when you had...
- What happens when a companies stock is all bought up and no one wants to sell? Winston asks: For instance, I have a small IPO, offering 3,000 stocks. My mom buys 1,000 shares, and my other...
- How do I get in on Visa IPO paying the IPO price instead of the price on exchange? Vickie asks: I don't want to wait till it gets on exchange when the price might be doubled. I want...
- How to determine the IPO stock price? Garry asks: Given the initial earnings per share $4, net income growth 35%, and sales growth 15%, common stock price...
companies cannot “make sure” that their stock price goes up. Because the company is public, it is bought and sold on the open market. There is no way to insure that it will rise. Usually IPOs rise on the first day of trading because of all the hype.
On a side note, of course the company wants their stock price to go up…that is the board of directors’ job. They serve the shareholders. However, nothing is certain. If you can get into a random IPO, in fact you have a higher chance of losing money than gaining it. All those companies that went huge like Google and Microsoft were exceptions to the rule that many companies that go public Will Not Survive!
They usually don’t. Generally companies wouldn’t really care what happens with their stock once it goes public and to be honest neither would the underwriter provided all the shares sold. That being said if the underwriter has some shares to sell or wants to make it attractive for the current holders who didn’t flip you’ll see them adding in what is known as a “booster shot”. I like to call it idiot guidance. This is when the underwriter decides to initate coverage on a stock at buy or strong buy which then bumps the price up so their big players can sell at a profit. Isn’t it a huge suprise that the lead underwriter would want you to buy the stock… shocking….
For that strategy to be honest the underwriters would have to be complete morons and bad at math. Underwriters get paid a percentage of the IPO and companies get cash from selling stock. Why would underwriters underprice an issue and not get the company all the money possible and not get the highest comission possible? It’s obvious that they wouldn’t. The IPO issue price is the maximum value that the stock should sell for. Anything more is truly speculation on future earnings. Anything less is probably real value. Sure stocks go up in some cases after an IPO but many times they go down. It depends on what the cash is being used for. Generally when stock prices rise exceptionally high it’s just speculation action and I recommend that you keep stop orders fresh on something like that.
I have to disagree with the previous answers.
First of all, there is a dance going on with the underwriters and company in any IPO. The company wants to get a high return for it’s stock. The underwriter wants to see its institutional investors make money on the deal as well (for a variety of reasons). The pricing is often a balancing act between the two.
Many times, the deal is so hot, that the company is more than satisfied to see the stock open up 50% or more from the offering price. Such action generates substantial publicity for the company, something that you just can’t buy with marketing dollars.
It also feels good to the company employees and executives.
Meanwhile, the underwriters often exercise their “Green Shoe” making even more money and their favorite institutional investors will now be on board to buy some of the less desirable IPOs. It’s all part of the game.
By the way, underwriters are allowed to “stabilize” a stock at it’s IPO.
To summarize, the pricing of an IPO is a complex balancing act that takes into account many different and often competing desires by the Underwriters, the Company and the Investors. It’s an art, not a science.