Finance Weekly News Update February 25, 2017 – March 3, 2017

 

Snap Co-Founders Score $3 Billion Gain on First-Day Trading Pop

Primary Topic – investment banking

Metcalf, Tom

Bloomberg.com

Key words and Definitions

Investment banking – the process of putting new equity or debt offerings together for clients and either buying the offering outright or selling the offering to investors for the client.

Offer price – the price that new equity issues are sold to the public in the initial public offering.

Underpricing – the practice of setting the offer price below expected value, or the price anticipated in the secondary market.

Summary: Key Points in the Article

Snap Inc. opened trading on the secondary market at 41% above its listing price. Investor demand for the tech stock pushed the firm’s opening stock price on the secondary market to $24 a share and increased the co-founders’ net worth by $1.5 billion each on the first day. Snap Inc. raised $3.4 billion in the IPO even though it posted a 2016 net loss of $515 million.

Early venture capital investors, such as Benchmark Capital, also profited nicely with an $846 million increase in the value of their shares. While first day jumps are common in high profile IPOs it is no indication of long-term gains. Twitter Inc. flew 73% higher on its opening day but it now trades about 40% below its offer price.

Thinking Critically Questions

  1. Why do investment bankers tend to underprice IPOs?
  2. Why do investors still demand stock in firms that lost money in the most recent year?
  3. Why is it difficult for a typical investor to buy a hot IPO at the offer price?

Multiple Choice Questions

  1. When a stock trades on the secondary market the firm receives:
    a. nothing
    b. the offer price
    c. the listing price
    d. none of these
  2. A group of underwriters that collaborate to place an IPO is called a(n):
    a. underwriting syndicate
    b. commission group
    c. group prospectus
    d. none of these
  3. When the investment bankers buy the IPO outright and then sell it to investors it is called a IPO.
    a. firm commitment
    b. best efforts
    c. spread
    d. none of these