See: Greenshoe. See: Underwriter.
Overallotment is the new and improved, more PC term for the option to sell more shares to the public in a given offering.
When bankers have done such an awesome job hyping...er, um, marketing a given security for sale to the public, they often receive the automatic right to sell a chunk more to the quivering, hungry masses. Like...if PJ SilverSlacks is selling 10 million shares of whatever.com to mutual and hedge funds and family offices all over the world, and they do a great job marketing, then their overallotment allowance might be something like 1.5 million extra shares, for a total sale to the public of 11.5 million shares.
Remember that they get commission on each share. Call it a nickel? A dime? Sometimes they take a spread in buying at $19.70 and reselling at $20. Depends on the flavor of the underwriter's agreement. But that's the gist.
So once the infrastructure is all paid for (meaningful fixed cost), then the contribution margin of additional shares sold is very high. That is, the sale of those additional shares didn't really cost the underwriter much, so they are happy to sell. And in most cases, companies, at the right price, are all too happy to dilute themselves a tad more but raise a boatload more cash. Everyone's happy in a bull market.
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Finance: What is an Underwriter?82 Views
finance a la shmoop what is an underwriter Undertaker underwriter
taking your company public well then you need one of these guys and yeah if [Woman writing at a desk]
things go poorly well then you may need one of these guys but if things go well [Gravestone]
an underwriter will get to know your company audit your financials give their
Good Housekeeping Seal of Approval to the investment community with whom they
deal regularly and introduce you as part of their family selling a piece of your
company to that world you know hedge funds mutual funds private wealthy [List of benefits that come with an underwriter]
investors such that they are the you know financial wind beneath your wings [Skyscraper flying away]
for a brief moment in time the underwriter usually an investment bank
like the vaunted Goldman Sachs or Morgan Stanley or JP Morgan or UBS or Sumitomo
will actually themselves own whatever piece of your company you are bringing [Logos for the banks appearing]
public like if you're selling 18 million shares at 20 bucks the bank's our
underwriters take a new public will own all 18 million shares having paid you
$19.60 for them and then turning around five minutes later and selling them for
20 bucks to John Q invest or making 40 cents a share in spread or markup or in [Spread calculation shown]
this case 40 times 18 million or 7.2 million dollars just for the pleasure so
that's an underwriter and if they screw up well yeah and ironically the [Underwriter stamp]
announcement he'll see in the digital paper is usually in the shape of a
tombstone announcing everything why a tombstone well because it represents the
death of ambiguity or confusion in that company's former life as a private one [Gravestone for ambiguity]
The Undertaker's hopefully have far far away [The Undertaker running away with the word confusion]
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