IPO underwriting costs

Stock market


For helping take a company public, investment banks charge a whopping 7% fee (among numerous other fees, including a “greenshoe option” to purchase shares that are nearly guaranteed to gain value).  For example, daily deal darling Groupon just went public on Friday and raised $700 million (i.e., 35 million shares at $20 apiece) and therefore the investment banks will take home a whopping $49 million.  In the third quarter of 2011 55 companies filed to go public (including Farmville creator Zynga) looking to raise roughly $9.5 billion – the underwriting investment banks will take home a tidy $665 million for their part in the effort.

What is truly interesting about the 7% number is that it never seems to vary.  In fact, over the past two decades I have never known it to change.  Ever.  I know that antitrust investigators have sniffed around this industry since the dot-com bubble of the 1990s but nothing ever seemed to come from those efforts.

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