Question

Netscape planned to offer 3.5 mln shares at $14 in an IPO. A day before the offering their underwriters suggested to change the offer to 5 mln shares at $28. Netscape had an IPO on August 8^th, 1995 -- 5 mln shares at $28 were offered (excluding the 15% overallotment). During the first day of trading, the price of the stock rose to a maximum of $73 and closed the day at $54. How much money did Netscape ‘leave on the table’? For simplicity, disregard the overallotment shares and the underwriter’s spread.

Answer 1

'Leaving money on the table' refers to the first trading day returns earned by initial IPO investors in monetary terms and it is measured by the difference between the closing price on the first day and the offer price multiplied by the number of shares offered.

Thus, in the given question,

Number of shares offered = 5 million

Offer price = $28

Closing pricce on the day of IPO = $54

Money Left in the table = (Closing price on the day of IPO - Offer price) * Number of shares offered

=($54-$28)*5 millon = $130 Million or $130,000,000

This shows that the company has underprices its share price and it had left $130 Million in the market which it could have otherwise earned had the offer price was set higher. High price of $73 is not relevant as the closing price is considered for calculaing the money left.

(As mentioned in question, overallotment shares and the underwriter’s spread are disregarded).