Visa’s initial public offering
moneyrelations :: Feb.26.2008
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Visa is getting headlines with its initial public offering (IPO) that could very well be the largest in US history. New investors might be wondering how IPOs work and how they might get in on the action.
I wondered too, and got a reality check for my efforts.
IPOs aren’t for small time retail investors like you and me. To understand, here’s my layman’s explanation of what happens at a company’s initial public offering.
One of the ways a company can raise money is to go public and sell its shares. To do so, it visits an investment bank. The company hammers out a deal with the investment bank on what types of shares are to be sold, how much money to raise, etc.
One strategy to raise money is called a best efforts commitment through which the bank ramps up the marketing hype and takes a commission on the shares sold. However, it does not guarantee the amount of money to be raised.
Another method is called a firm commitment whereby the bank guarantees the money by buying the company’s shares to later resell to the public for a higher price. Since the risk is high for one bank to bare, it forms a syndicate with other investment banks for a share of the profits.
Finally, does the initial public offering actually trickle to the general public? Not unless you’re a “very good customer” with one of the syndicate banks. The fact is, IPOs are marketed to the institutional investors who have huge amounts of money to invest.
So, if you’re interested in Visa, wait awhile and sit tight. IPOs are generally a strange beast in that there’s lots of hype drummed up by the bank underwriters. Since the general public can’t get their hands on hot IPOs, institutional investors sell their shares to us for a quick profit. They take advantage of the feeding frenzy only to repurchase the shares when things have settled. Does Lululemon ring a bell?
Visa is an iconic name but for now, I’m not going to give it the credit it deserves. It will be interesting to see how this one plays out.
Definitions, In the news, Investing ::
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I found your blog on google and read a few of your other posts. I just added you to my Google News Reader. Keep up the good work. Look forward to reading more from you in the future.
Jason Whitmen
You can always buy the shares immediately via your discount brokerage or regular stockbroker, the hour the shares actually go public. The stock wont’ usually have moved too much in the first minutes or even hours.
But keep in mind that IPO doesn’t always mean the price will go up. Investment bankers basically make up the price at which they think the stock should be offered, and sometimes the value drops after the IPO.
Also, many companies who are in trouble use IPOs to try to hide/avoid that reality. After all, what they’re doing is raising money–if the company was doing great and they thought shares would continue to rise, they wouldn’t be diluting their current shareholders’ value by spreading the company among millions more investors.
Sure, great, stable, profitable private comapnies often go public simply because the owner(s) want to cash out while the getting’s good. But it’s also sometimes a desperate move. And given what’s going on in the credit markets right now, I’m not ready to bet on Visa.
Wow, I always thought they were a public company, I guess I never really thought about it. Apparently MasterCard just went public a couple years ago, I would have figured these major companies would have gone public a long time ago.
@Meg: What Mariam is referring to is being able to buy the shares at the prices which the company issuing the shares is selling to ‘prime’ investors/institutions.. not at the market value once they’re public. If you look at what has happened in the history of IPOs, most IPOs open at a price much higher than that received by the company issuing the shares. As pointed out by Mariam, the reason for this increase in price is due to the hype generated by the investment banks and the desire for investors to own something new (and hopefully successful). So, essentially, these ‘prime’ investors/institutions can make a guaranteed killing by selling on the first day just because they already wealthy. I agree that sometimes an IPO may actually open at a price lower than it was sold, but it’s rare. In fact, it happened with Reliance Power not too long ago when it issued $3 billion USD, but that’s because any informed investor could see that the IPO price severly overvalued the company. Having said that, the hype caused the IPO shares to sell out in 60 seconds from time of issuance and were 10x oversubscribed!
I got invited in on this once, as an investor just before it truly went public. It was for this really smart kind of payphone. I invested my teeny nest egg (before I knew better than to do that) entirely. This was in the early 90s, just as cel phones lifted off. Fill in the tragic ending of the story for yourself, sigh.
Hi Jason,
Thanks so much for your readership and comment. Hope to see you around these parts again
@ Meg and Adil
Great comments and insights. They are better than my original post!
I think what Meg is referring to is when some of the IPOs are correctly priced so they won’t go through as much flipping by the institutional investors making a quick profit. But I also understand where Adil is coming from with the first day pop of hot IPOs. But buyer beware… here’s a little abstract “Institutional Investors Reap Greatest Returns from IPOs“.
So, for the beginner investors in my readership, take caution in what both Meg and Adil advise.
@ Chris
Brand, baby. Brand. A well known company like this going public? This will be huge but let’s see what happens after the first year. I’m not sure how the credit crisis will affect Visa as from my understanding, it’s not a lender - that’s the banks themselves. And everyone uses the convenience of credit cards but Visa gets the fees…
@ Nancy
And how’s your relationship now with the person (broker?) who offered this to you? Nice sales job