The Greenshoe word is spoken of in hushed tones in the lead up to any Mega-IPO.
So here’s a truism: Do not revere the Greenshoe.
In effect, if the IPO ‘succeeds’ you end up getting diluted.
And well, if the IPO fails – on listing day that is – then in any case, you are seeing the market marking you below your allocation price.
You might want to think the Greenshoe is about price stabilization.
Not really.
While it sounds investor-friendly to say the greenshoe stabilizes the price for the issuing company and new investors, the structural design of the greenshoe is overwhelmingly weighted in favor of the underwriter.
It is essentially a risk-free, asymmetric bet for the syndicate underwriting the issue.
How?
Even before the stock opens for trading, the underwriter has deliberately opened the highest form of risk for itself by over-alloting the deal by 15% (15% in the context of US listing, that is).
This is, in effect, a naked short postion, of say 15 million shares if the IPO was for 100 million shares.
From hereon emerges two scenarios:
A. Stock drops on listing. Sure, the underwriter does stabilize price but the act that leads to that is their short position getting covered. This may still be a nicer thing for long-term holders of stocks because you do not get diluted.
B. Stock pops on listing. The underwriter is seeing potentially infinite losses now on its open short position. The underwriter will now exercise the greenshoe option. The company now issues 15 million more shares. At the original IPO price. And even if you are seeing market gains on your allocation, your ownership in the firm has been diluted with that pop at listing.
In the context of this mega-IPO: the SpaceX greenshoe option has been fully exercised. The underwriters fully exercised the standard 15% over-allotment option within the first week of trading.
This does not make IPOs that are underwritten bad or the ones that list directly good. That is not the point.
Investing is great.
You must do it.
It can be incredibly rewarding.
It is also fraught with risks.
Please make sure you consult a licensed financial advisor.
Truisms Matter.
