No You Don't Get the Hot IPO! Why? I'll Tell You Why!!

Two to three times a year a "can't miss" IPO hits the market and everyone wants a piece. You remember the internet IPO craze where a B.S. company was priced at 15, began trading at 40 and closed at 60 and everyone made a killing and spent thousands on stuff they didn't need and strippers that "loved" them. So, your ears perk up and you turn the volume up on CNBC when they report that a "hot deal" is approaching. You ask me they "over report" certain news worthy items and influence appeal, but I digress--again. The first hot deal of 2008 was Visa. No, they weren't publicly traded.

Quick history lesson:

Mastercard IPO, 2 years ago priced in the forties, now trades at $225.

Anyone familiar with Mastercard was on their knees begging for Visa shares. 406 million share IPO, rumored to be the largest IPO in US history, twice the size of the 10 billion dollar ATT IPO. There has to be shares available for Mr. African American Investor, who's up on his IPO history, right?

Let me make this simple for you. Keep walking sir, there's nothing to see here.

If you think Bank of America, who is the lead underwriter on the deal and stands to make almost 600 million cares if you get a couple of hundred shares or 2000 shares, they don't. Here's why.

As the lead underwriter B of A guarantees Visa that they will purchase all of the shares on the day of the offering for the IPO price, minus the firms commission.

But they intend to sell them, or at least the bulk of them, immediately to their institutional clients but there's a catch. Those clients have to be "sold" first. If convinced, the institutions "subscribe" to purchase shares on the day of the IPO. Since the price is not determined until the last minute, institutions put in a subscription request for a certain number of shares, but the exact cost is unknown.

That's right. They know, but they don't know. Ya'know?

Investment bankers gauge the demand, and set a price as high as they can, balanced by trying to ensure that everyone will buy it.

The key is Bank of America wants to make sure the bulk of investors hold the IPO shares for the long-term. Not flip them as soon as possible. The investment bankers, who will be market makers in the stock, prefer to have friendly hands holding the stock for as long as possible. What they don't want are thousands of smaller investors trading out of the IPO the first day at a nice profit.

Bank of America doesn't want to see you happy with a profit, they'd prefer to see you holding.

So to attempt to control early trading they give more shares to larger investors who generally have a track record of holding positions for the long-term. Oh one more thing, they're probably rich! I know you have an account with B of A. Who doesn't but they didn't get Visa IPO shares either.

The small investor is relegated to waiting and trading. In the case of Visa, it was priced at 44 the night before trading, opened at 59, ran to 69! Sold off to 55 and closed at 59 first day. What we know is over 400 million shares owned Visa at the IPO price of 44. Some hold, many sold but unless you're Tiger Woods or Shaq, who each have millions in Google before the IPO (involved in the private placement, another blog) and haven't sold much if any. Bitch and moan all you want, but you have to wait for the hot IPO deals like the rest of us-- after they begin trading.