Examining The Process Of An Initial Public Offering

Originally published on June 13, 2011 7:48 am
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Unidentified Reporter #1: Huge investor demand has shares of LinkedIn soaring in its Wall Street debut.


IPO: Groupon filing today to really capitalize on the IPO craze.

IPO: Zynga, the maker of those games on Facebook is said to be close to filing its IPO.

INSKEEP: Welcome to the program.

ANDY KESSLER: Thanks for having me.

INSKEEP: How big is this wave of IPOs compared to what we've seen in the past?

KESSLER: Well, it's been a 10-year drought, so it's about time that companies that have been working hard all these years can come public again. And, you know, IPOs are capitalism's carrot, right? It's they're hung out in front of entrepreneur's incentive for them to work hard, pull all nighters, jug Jolt Cola and change the world. And, you know, the IPO is the event that finally puts a value on all that hard work. And for investors, it's a chance to catch a rising star.

INSKEEP: How could this frenzy be starting again, given that so many IPOs in past years a decade ago turned out so badly?

KESSLER: Well, we're at a point where there's a lot of great companies that have been gestating for 10 years. I mean LinkedIn is not an overnight success. It's been around for quite a while, and it's in the process of changing how companies hire workers. And the stock market provides access to capital for the next wave of great companies and LinkedIn was one of the first ones to go out. And hopefully, there's going to be another wave of great companies.

INSKEEP: So how do investors what's a fair price in this circumstance? Is it easier now to tell that because some of the companies had been around a few years and have a track record?

KESSLER: Yeah. Well, that's what makes it so fun. There is no fair price. I mean what most people don't know us that in an IPO process, the management of the company flies around the world meeting institutional investors, meeting with the Fidelity and Janus's and mutual funds and pension funds, etcetera, in a process of whipping up excitement for what they do. And then the underwriters, Goldman Sachs or Morgan Stanley, then goes and says okay, how many shares can we sign you up for? And many of these companies say I'll take as many as I can get. I'll take 10 percent of the deal. And so often these deals are if they sell maybe five million shares there will be orders for a hundred million shares or hundreds of millions of shares. And then the underwriters divvy it up in small portions and companies have to buy more after the stock starts trading. So it's this funny auction where there's a limited supply and a lot of demand. It's not until a stock has been trading for weeks or months until the stock market will settle in on what the right price is for any company.

INSKEEP: I want to ask who gains from this process. And here's what I mean by that. You have some private investors who are selling off, companies are selling some shares at least in the companies that they've grown. Is that going to in the end help the companies or just help the old owners?

KESSLER: But the ones that do the best are the ones that get allocated shares in the deal. That, you know, it doubles in the first few minutes, you know, you do quite well, and then similarly, the underwriters, the Morgan Stanleys and Goldman Sachs' of the world, they do quite well because they charge seven percent fees to go public. So when a, if you go public at $10 a share, that's 70 cents as opposed to a penny a share of trading commissions. So it's a very lucrative business for Wall Street to take companies public.

INSKEEP: So when we talk about a craze or a frenzy or whatever name is being applied here in the business reports to the excitement of the moment, how in your mind, does it compare to the excitement at its peak of the dot.com boom a decade ago or more?

FESSLER: Yeah, if the dot.com boom was a 10, we're at a three.

INSKEEP: You don't sound very excited.

FESSLER: No. It's the early stages of it. I think when you start getting companies that, you know, have no business plan and no business model and just a, you know, social media in their name and go public, then we'll be at an eight, nine or 10.


INSKEEP: So maybe it's better for business to be a little bit lower on the scale, is what you're saying.

FESSLER: In terms of the sustainability of the capital raising process, absolutely. You want to be in the rational phase rather than the irrational phase, and I think it is still ration.

INSKEEP: Okay. All right. Avoid the exuberance, rational or otherwise.


INSKEEP: Mr. Kessler, thanks very much.

FESSLER: Thank you. Transcript provided by NPR, Copyright NPR.