The IPO Buzz: Fat Cats and IPO Fees

Mark Twain was quoted as saying, “If you don’t read the newspaper, you are uninformed; if you do read the newspaper, you are misinformed.”
True, underwriters did pocket $32.5 million in fees, according to the front page of its prospectus, but they also underwrote 100 million shares at $10 each to raise $1 billion.
That made the underwriting fee 3.25 percent.
This was the second-lowest underwriting percent fee of all the 140 IPOs offered in the U.S. capital markets in 2011, according to the U.S. Securities and Exchange Commission.
Yes – the second-lowest underwriting fee for all of 2011.
Most underwriting fees range between 6 percent and 6.5 percent. This isn’t a state secret. This information is available in each final prospectus. The billion-dollar babies have lower fees ranging from 3.5 percent to 5 percent.
An All-Time Low
The Kinder Morgan (KMI) IPO, priced in 2001, had the lowest fee — at just 3 percent.
On Feb. 2, 2011, Kinder Morgan priced 95.5 million shares at $30 each to raise $2.87 billion. The underwriting fee was 90 cents per share.
But don’t go away.
One of Wall Street’s leading rating services was sourced as taking the Street’s greed a step further and reported what each underwriter sucked in on the Zynga IPO.
All the rating service did was to take the number of shares each manager underwrote and multiplied it by the underwriting fee of 32.5 cents per share.
That, too, was classic Mark Twain.
So Misunderstood
In defense of the rating service, the underwriting fee is generally one of the most misunderstood fees on Wall Street.
The underwriting fee, or “the spread” in Wall Street jargon, is the total of three different and separate functions in the underwriting process: (1) Management (2) underwriting and (3) selling. Each earns a fee.
**Management Fee
In the Zynga offering, the management fee was 7.25 cents per share, or $7.25 million. This fee was divided up among managers, according to what each contributed to the underwriting. And what each manager actually received was never made public.
**Underwriting Fee
In the Zynga offering, the underwriting fee was 7.25 cents per share, or $7.25 million. This fee was earned for assuming all underwriting risks to bring the deal public. And there are expenses, such as underwriters’ legal fees, which can run up into the millions of dollars, plus accounting fees, the aftermarket support for the IPO, and the list goes on and on. What each underwriter earns is based upon the number of shares each underwrites. This is public information. It’s found in the final prospectus.
Now, here’s the catch.
When the U.S. Postal Service delivers the envelope from the lead manager, it just might not have an underwriting check in it. It could be a bill for expenses that exceeded the underwriting fee.
**Selling Concession
In the Zynga offering, the selling concession was 18 cents per share, or $18 million. An underwriting selling group can consist of the managers, other underwriters and selected non-underwriters, such as discount brokers. Each earns the commission based upon the number of shares it receives from the lead manager for distribution to its clients. As to what each selling group member receives to re-offer the stock to its clients, that figure is never made public.
Revisiting Zynga on Day 1
Now let’s take a look at the shellacking that Zynga’s investors took on its opening day. (Thank you, Mr. Twain.)
The Zynga IPO was priced at $10 per share on Thursday evening, Dec. 15. The NASDAQ reported the IPO opened on Friday, Dec. 16, at $11 per share – UP $1 – or 10 percent from its initial offering price. Zynga’s stock closed at $9.50 on its first day on volume of 116.8 million shares. Note: There were 100 million shares in the offering.
Many “flippers” reported selling their Zynga shares on the opening trade at $11 per share. If they hadn’t, they still had time to bail out before the deal broke issue price. That didn’t sound like everybody took a shellacking.
You’ve got to love the financial media and what Mark Twain had to say.
Next week kicks off the 2012 IPO season. So we will have more on that later.
Stay tuned.
Disclosure: Neither the author nor anyone else on the staff has a position in any stocks mentioned, nor do they trade or invest in IPOs. The author and staff do not issue advice, recommendations or opinions.