What exactly do banks do during the IPO process? Why is it always the same investment banks that are a part of the process namely JPM, GS and MS. Also, how do they keep things confidential when they basically help company A and all of company A's rivals go public? Am I missing something here? Are we just supposed to trust banks??
For large IPOs there is always a team of bankers from various banks that partner together to float the company public. Actual IPO process involves correctly valuing the company, generating interest by selling stock before IPO process and making sure the stock doesn't tank on the launch day. Banks also offer underwriting service (Google it) which helps with investors. You hear GS, JPM and MS names cause they are the best and leaders at what they do.
Also note that stock price is a affected by the trust in a company. It’s a chicken and egg problem. Trust will go to 0 if you IPO by yourself and your stock fluctuates wildly -50% to +50% on IPO day. If that happens, most sane investors will pull money and wait for a quarter to see if you’re stable. Then your investors get pissed because they can’t cash out as expected and put undue pressure on you to deliver short term results or vote to kick you out of the board. Large investment banks mitigate this risk by providing liquidity - i.e. they guarantee to buy+sell your stock with their own money or their clients influence to maintain your stock price up to some extent. This builds instant stability and trust in the price post IPO. After that it’s up to you and performance that takes your company further. The banks also help generate initial demand among big institutional players by getting them to bid against each other before the public has a chance to unload on the stock - it’s kind of legalized pump-and-dump except that the stock does have intrinsic underlying value.
How is this different from a pump and dump?
Think about what a real estate agent does when they sell your house, and it's basically the same. When you sell your house, you want to fetch the highest price possible. To the point that you would pay a 1 or 2 percent commission to an agent to sell it for you, with the expectation that the agent knows the market better, has experience selling houses, and can get you 10 or 20 percent higher of a price than if you were to sell it yourself. Is a real estate agent necessary? No, neither are they that useful... But in general, you would hire one anyway because any incremental percent higher of a price you sell your house at is tens or hundreds of thousands of dollars. These banks, like agents, have a rolodex or Numbers to call into the c suite of many relevant companies which may want to buy your company, or shares of your company. This is something most people don't have. So they line up a whole bunch of people and try to create artificial demand. They tell buyers "look, this is a hot property, a lot of people want it. If you want it, you better sharpen your pencils and give us a real competitive and serious bid" Does this work? When rbc advised burger kings sale to Tim Hortons, they made up a false bidder, told Tim Hortons to keep raising the price, essentially played buff for 3 times. They got Tim Hortons to increase their bid 3 times when there was no one else bidding on the asset. Were they necessary? Not really. But you can argue that they jacked up the price of the sale by billions of dollars and thus made a lot of people happy. So yeah And as for confidentiality, banks on paper take this stuff seriously cause no one wants to get sued. A bank can't share info, and if two teams are working on similar projects, they can't talk to each other. Hence why things like dating colleagues is a Grey zone in banks and you might get fired for things like that
Best answer.
+1
They create hype to get stock price. It’s about time tech comes with better alternative. Also there is no way for individual retail investor to participate in it.
ICO?
Missing point, they offer the ipo to their best customers as a reward. That's literally the best part (assuming you are the best customer).
Just like real estate agents, doctors giving prescription, unions in public sector jobs, etc. It is just a way of protecting their own interest by forcing you using them.
No. Google Spotify IPO and learn
Probably not necessary for big companies that can get the deal hyped without a bank (e.g., Uber, Lyft...) but for smaller companies they would have trouble finding investors and wouldn't know how to navigate the complex legal issues of going public
Uh lyft hired JP Morgan as lead underwriter, along with credit suisse and Jeffries. Some of the biggest ibanks on wallstreet They also retained a bunch of other banks for smaller advisory roles.
Lyft has an inexperienced CFO who got taken advantage of by hedge funds who invested in the company and dumped their stock on IPO day
I've heard investment banks can get 7% of the amount raised during IPO. 💩🤦🏻♂️
They mainly make money from three sources Advisory fees (valuing the business, due dil, advice towards the offered business) Market making(matching people with money pre IPO) Stock holding (if there's no initial demand the bank will step forward buying the shares and holding it as stock for short selling or later demand)
Usually less than 1 percent. 7 percent is typically underheard of. Idea is that they can increase your share price by at least the fee you're paying them... And while they should do more than 7 percent, that's... Quite a hefty price
Underwrite the ipo. Basically if there is insufficient demand, the bank is on the hook for the balance
They short the competitors
Trust no one :)