Last updated on April 13th, 2021 at 01:21 pm
Greenshoe Option: Hi, Friends Today I am going to share some interesting information on the topic of the Greenshoe Option. Please go through the article and enjoy reading it.
Greenshoe Option – Meaning, Basics, Practical, Real-Life Example
What is a Greenshoe Option?
A Greenshoe option is an over-allotment option. In the statement of an initial public offering that is IPO. It is a provision in an underwriting agreement that grants the underwriter the right to sell the investors more shares. Then an initially planned by the issuer, if the demand for a security issue proves higher than they expected.
The Basics of a Greenshoe Option
The Over-allotment options are known as Greenshoe options. Because, in the year 1919, Green Shoe Manufacturing Company is now part of a Wolverine World Wide, Inc. That is WWW was the first to issue this type of option. A Greenshoe option provides additional price stability.
To a security issue because the underwriter can increase the supply and smooth out price fluctuations. It is the only type of price stabilization. That is a measure permitted by the Securities and Exchange Commission. It means SEC.
The Practical Workings of Greenshoe Options
Greenshoe options typically allow the underwriters to sell up to 15% more shares. Then the original amount is set by the issuer for up to 30 days. After the IPO if demand the conditions warrant such action. For example, if a company instructs the underwriters to sell 200 million shares.
The underwriters can issue if an additional 30 million shares by exercising a Greenshoe option. The 200 million shares x 15%. Since many of the underwriters receive their commission as a percentage of the IPO. They have the incentive to make it as large as possible.
Giving details of a share offer for the benefit of investors. Which is the issuing company files with the SEC before the IPO. Details the actual percentage and also conditions that are related to the option.
The Underwriters use Greenshoe options in one of two ways. First, if the IPO is a success and also the share price a sudden powerful forward. The underwriters exercise the option and buy the extra stock from the company.
At the established price, and also issue those shares, at a profit, to their clients. Introducing a statement, if the price starts to fall. They buy back the shares from the market instead of the company to cover their short position. It also supporting the stock to stabilize its price.
Some of the issuers prefer not to include Greenshoe options in their underwriting agreements. Under certain circumstances, like if the issuer wants to fund a specific project. With a fixed amount and has no requirement for the additional capital.
Real-Life Example of Greenshoe Options
Ant Financial, the Chinese financial services giant, is planning an IPO on exchanges in Hong Kong and Shanghai. In an effort to raise more than the profit of $35 billion. The company has included a Greenshoe option of another $5 billion. If there is a strong and healthy demand for its shares.
Another well-known example of a Greenshoe option at work that is occurred in the Facebook Inc. (FB) IPO of the year 2012.
The underwriting syndicate, which is headed by Morgan Stanley. It is agreed with Facebook, Inc. to purchase around 421 million shares at the cost of $38 per share. Less a 1.1% underwriting fee.
However, the syndicate sold at least 484 million shares to clients with a 15% above the initial allocation. Effectively creating a short position of around 63 million shares.
If the Facebook shares had traded above the price of $38 IPO price. Which is shortly after listing. The underwriting syndicate would have exercised the Greenshoe option to buy the 63 million shares from Facebook. At a cost of $38 to cover their short position. Avoid having to repurchase the shares at a higher price in the market.
However, because of Facebook’s shares that it declined below the IPO price. Soon after it started trading. The underwriting syndicate covered their short position without exercising the Greenshoe option. At or around $38 to overturn the price and defend it from the falling sharply falls.
So, this is important information on the topic of the Greenshoe Option. Here I have mentioned the Meaning, Basics, Practical Workings, and also the real-life example of the Greenshoe Option.
If any Queries or Questions is persisting then, please comment on the viewpoints.