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The IPO process
bookrunners will “scrub” the demand to
identify which orders are “real” as opposed
to those that have been placed to “game”
the allocation process. The overall demand
in the order book is known as gross
demand, while the actual shares that the
bookrunners will look to allocate is known
as allocable demand.
(d) Pricing, trading and closing
The pricing meeting typically includes
the company and key selling shareholders,
as well as the bookrunners. In advance
of the offering, the board establishes a
pricing committee to formally approve the
offering. When pricing a deal, numerous
factors that occurred over the roadshow
are taken into account-general market
conditions, the performance of the overall
market and the company’s peers during the
roadshow will all affect levels of pricing
and demand.
Additionally, new issuance activity
and the performance of recent precedent
transactions will have an overall effect
on the company’s IPO price, either
positively or negatively. After reviewing
the roadshow summary—which includes
an overview of accounts with which
management met, the hit ratio/success
rate from these meetings and key feedback
themes, as well as gross demand, allocable
demand and price sensitivity in the order
book—the bookrunners will communicate
the price per share recommendation
to the company and give the pricing
committee time to deliberate on the
recommendation. The ultimate goal of
the pricing recommendation is to achieve
the best possible price for the company
while allocating to the highest-quality
shareholder base and ensuring that the
investor base is achieving attractive
valuation and will receive an IPO “pop” on
the first and subsequent days of trading.
It is in the best interests of the company,
key beneficial shareholders and the
bookrunners that the stock trades well in
the aftermarket.
Once the company and its pricing
committee have formally agreed on an
IPO price with the bookrunners, the
underwriting agreement is executed by
the company, any selling shareholders and
the underwriters, pursuant to which the
underwriters make a firm commitment
(subject to certain customary conditions)
to purchase the IPO shares and resell
them to investors at the IPO price. The
bookrunners begin the allocation process
overnight, determining exactly how
much stock (if any) to allocate to which
accounts. The goal of the allocation
process is to create a high-quality, longterm,
focused shareholder base for the
company. Once allocations to each account
have been agreed upon by the bookrunners
and the company, the syndicate “breaks”
prior to the market opening the day after
pricing and allocations are communicated
to each of the individual investors.
On the first trading day, the NYSE
will coordinate a time at which the newly
public stock will officially open. The
Designated Market Maker (DMM) is
responsible for opening the stock at that
time. In addition, the stabilization agent
is the bookrunner chosen to open the
trading in the stock after the offering and
to provide support to the stock price. The
market will look to the stabilization agent
as the syndicate bid in trading support
for the offering. The stabilization agent
may commit capital to provide liquidity in
the common stock market if the stock or
market comes under pressure immediately
after the offering and can also use the
short position created by the IPO overallotment
(typically 15%) to repurchase up
to 15% of the shares offered in the event
the shares fall below the offer price.
The IPO will officially close three days
after the first trading day of the stock
(T+3). At that point, all of the funds will be
wired, stock transfers will be completed,
the legal documentation will become
unconditional and the IPO will officially
close. ●
42 NYSE IPO Guide