snap Inc.’s IPO was a hit on last Thursday, pricing at $17 per share and skyrocketing 44% to $24.48 per share by market close. It looks like that founders Evan Spiegel and Bobby Murphy are the last winner,but remember,Wall Street also is.
Now let’s see how Wall Street makes millions on IPOs.
The first cut banks take is the commission they get for the IPO. Snap didn’t take home $2.465 billion ,it will take home something less after the underwriting commission. We don’t have the final number yet, but the fees disclosed indicate that bankers such as DB will get about $85 million, or 2.5%, of the base 200 million share offering. That’s a nice payday, but it’s actually lower than a typical IPO fee because banks were fighting hard for one of the few high profile IPOs expected in 2017. But that fee isn’t where the real money is and it’s not why Wall Street won the Snap IPO.
But the real money is made in what’s called the overallotment. Bankers are usually given an option to purchase 15% more shares than the base offering in what’s called an overallotment option. In this case, underwriters can exercise an overallotment of 30 million shares for as long as 30 days and they’ll pay the $17 IPO price. Shares closed Thursday at $24.48 per share, so at that price Wall Street bankers have the option to buy shares for $17 and turn around and sell them for $24.48 on the open market. They could pocket $224.4 million just based on the opening day pop in shares.Tags: bank, DB, ipo, snap, wall street