Stock is a financing tool for companies. There is no risk on behalf of the underwriter if they already found clients. In 1999, I-Banks would make agreements with the mutual funds and pension funds that it would underwrite these BS dotcoms and offer it to the funds at a cheap price. The I-Banks would then release analyst research that pumped up the stocks and valued them above what the funds paid for them. The I-bank received hefty fees for this while the fund were able to show great returns and sucker in more and more people. To be fair, a company can have negative earnings for quite a few years before turning the corner and exploding. That is why their stock may actually have value, due to pricing in future growth and earnings. The initial capital infusions may require a lot of borrowing and stock offerings in order to make the success happen. That is the ideal view and yes sometimes that is what happens.
so do the underwriters/investment bankers really care about the quality of the company? Seems like the more companies that go public the more money they make?
You got it. They just take a cut (last I heard 5-9% of the deal divided among the underwriters). Not a bad business, eh? What's more -- company management is probably selling shares in the IPO too and cashing out. The i-banks barely have to hold the stock b/c they pre-subscribe it to the mutual funds and other institutionals....then the i-banks take the money that management made and send it off to their "wealth advisors" where they earn 1% -- they also advise on derivative strategies like collaring the stock for the remaining shares that management still holds. If they have a large retail presence, they pan the stock off on their retail customers and make a comission on all of the stock they put in their retail customer's portfolio. They also give IPO shares for the sweet deals to institutional clients (hedge funds), in exchange for sweetened comissions on other trades.....of course they'll want to give their "strategic input" on any future debt issuance, and/or acquisitions/restructurings/divestitures...for which they'll take a 5-9% cut. They'll also actively trade the name and become the "Axe" in it so when the company has to do a buyback or when someone needs to acquire or sell a block, they earn 5 cents a share on the trades..... ....you get the picture.
LoL, what do you think? I-Banks do nothing more than make fees from deals. If the reality for a company to be the best it can be is to stay the same, the I-Bank will do whatever they can to show otherwise in order to score a deal. I-Banks went on a craze of doing internet IPOs for the very hefty fees. There is also quite some material that shows I-Banks slowly infusing the bubble with dirty money back in 1998 into 1999. Back in 2002, we had an alumni that was an I-Banker. He told a story of when he was an associate analyst (whatever the second tier is) back in 1999. His group was taking flipdog.com public. He looked at their financials once, went to his boss and said "this company will be bankrupt in 6 months and it's that obvious". His boss said "Don't worry about, just do the paperwork". What's funny to me now is that I do not think he ever figured out why they were still taking it public. I certainly did not know till I did some research. I always thought I-Banks took big hits for taking these companies public and that they were stupidly swept up in the bubble. Not at all and quite the opposite.
So basically "Joe Average" from the midwest somewhere can wake up and say he doesn't want to do the 9-5 rountine anymore, come up with some idea, make it a company, get ahold of an investment bank, and take public with out ever actually earning any money? And everyone but the investors who bought the stock wins?
Well...typically the "Joe Average" you're referring to is from Silicon Valley -- not to quibble over details -- Well -- you probably have to have some assets, some historical revenue for which you can make a believable case will grow at some hockey stick projections. You need to have the "economies of scale"/lowering costs as you grow, but immediately focusing on market penetration pitch down cold. You'll need to project positive free cash flow within 2 years and/or positive earnings on a "pro forma" basis. Always remember to tell the investors that the present value of a company is equal to the discounted sum of future cash flows...and show them the hocky stick graph of cash flows. You'll need to demonstrate a $1B target market. Lastly, you'll need a good powerpoint presentation. Also it's always better if A.) you have HBS, Wharton, or Stanford on your resume, or B.) You're under 30 yrs old and you're an engineering major of some foreign descent. But yeah, pretty much that's it -- also you'll need a bang-up powerpoint presentation and if you're a tech idea, some venture money from Benchmark or Kleiner Perkins. Also helps if the decade is 1990. Go for it.
from some of these companies i've seen go public, recently(within 2 years) it seems as though, someone just woke up with an idea and next thing you know, it's being mentioned on CNBC, seems recently the whole Chineese internet thing is becomming pretty common. I wonder none of these adult websites ever went or go public. You think it's because of the nature of the business?
There is logic behind why stocks go ipo even when they have net losses every quarter. Its because these companies require a lot more capital to expand their existing company to HOPEFULLY realize profitability sometime down the road. And an IPO is the quickest and safest way to get capital to reach economies of scale. Similar to amazon.com. Back in the 99, i believe their net loss for the year was 1 billion dollars???? But now, atleast they are net positive, be it a 600 p/e ratio. lol. The only reason why they are still around is because they were one of the first out, and had the capital to grab their huge market share. But that is just one side of the coin. I do agree that probably 98% of the ipos back in the days were just there to make the VC and investment banks millions. But hey, if your dumb enough to believe in all those Strong Buys and price targets of 100, you deserve it when they file chapter 7. xbrxx