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The Green Shoe Option

In 1919, the Green Shoe Manufacturing Company underwent an initial public offering (IPO) that garnered overwhelming demand for its shares. This demand exceeded the number of shares available for sale, prompting the underwriters of the offering to exercise a provision known as the "Greenshoe option." As a result, additional shares were made available to address the high demand. Following this successful move, the company was later renamed Stride Rite (as part of Wolverine World Wide, Inc.) and the strategy became popular as “Greenshoe option”.

A Greenshoe option is an over-allotment, price stabilization mechanism in the context of an IPO.

In 2012, Facebook made a notable financial decision during its own IPO by incorporating green shoe options. The IPO was managed by a group of investment banks led by Morgan Stanley, known as underwriters (They assess market conditions, determine fair value and many more crucial roles, also bear the risk of unsold shares during IPO process). These underwriters received 1.1% of the deal's proceeds to ensure the smooth sale of all stock, processing of payments, and the allocation of funds to the company and selling stockholders. Despite Facebook and its early investors intending to sell only 421 million shares in the IPO at $38 per share, the underwriters sold 484 million shares, seemingly exceeding the original plan.


The question then arises: Where did the additional 63.2 million shares come from?


This is where the Greenshoe option came into play. By exercising this option, the underwriters were able to increase the total number of shares sold in the IPO from 421 million to 484 million. Consequently, the amount raised by the IPO rose from $16 billion to $18.4 billion. This strategic decision proved advantageous for Facebook as the demand for its shares was exceptionally high.

The major benefit of the Greenshoe option was that if the share price experienced a significant increase after the IPO, then all happy happy. However, even if the share price started to decline, the underwriters would still support the share price to some extent by buying those additional shares.

Isn’t that amazing?


Also, here is a small task, try guessing the next post! Hint: It starts with Pink.


Thanks to these Sources: Investopedia, Forbes, The Blue Collar Investor.

1 commentaire


achintya
24 juil. 2023

My guess is Pink Tax !

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