Gross spread, expenses and money left on the table, split between the company and the selling shareholders, and restated in shares given away.
The true cost of an IPO is the invoiced cost, underwriting fee plus expenses, plus the underpricing: the first-day gain on every share sold, also called money left on the table. On an illustrative EUR 500 million primary offering priced at EUR 20.00 that closes its first day at 23.40, the issuer pays EUR 22.75 million in fees and expenses and EUR 85.0 million in underpricing, a total of 21.55 per cent of the money raised, of which 78.9 per cent appears on no invoice.
Worked in full in Capital Markets by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
An IPO prospectus discloses the gross spread and the expenses, and that is the cost most boards quote. But the shares are sold at a price set by the bookrunners, and if they trade 17 per cent higher by the close of the first day, the company has sold them for less than the market was willing to pay that same afternoon. That transfer goes to the investors who were allocated stock. It is a cost of raising money in exactly the sense a fee is, with the difference that nobody sends a bill for it.
| Input | Value |
|---|---|
| Offer price | EUR 20.00 |
| First-day closing price | EUR 23.40 |
| New shares issued by the company (primary) | 25.0m |
| Shares sold by existing holders (secondary) | 15.0m |
| Shares in issue before the IPO | 100.0m |
| Gross spread, on gross proceeds | 2.75% |
| Issuer's other expenses: legal, audit, listing, printing | EUR 9.0m |
First-day return = first-day close / offer price − 1
Money left on the table = shares sold × (first-day close − offer price)
True cost = gross spread × proceeds + expenses + money left on the table
Excel: =Shares*(Close-Offer)+Spread*Shares*Offer+Expenses, then divide by Shares*Offer
Step 1, proceeds. 40.0m shares at 20.00 raise EUR 800.0m: 500.0m for the company and 300.0m for the selling shareholders.
Step 2, the invoiced cost. The gross spread of 2.75 per cent is 13.75m on the primary tranche and 8.25m on the secondary, 22.00m in all. The company also pays 9.0m of expenses. Its invoiced cost is 22.75m, or 4.55 per cent of its 500.0m, leaving net proceeds of 477.25m, 19.09 a share.
Step 3, the underpricing. The stock closes the first day 17.0 per cent up, a gain of 3.40 a share. On the 25.0m primary shares that is 85.0m; on the 15.0m secondary shares, 51.0m; 136.0m across the deal.
Step 4, the true cost to the company. 22.75m invoiced plus 85.0m of underpricing is 107.75m, 21.55 per cent of the money raised. The uninvoiced part is 3.74 times the invoiced part.
Underpricing is easier to argue about when it is put in shares rather than euros. At 23.40 the company would have needed only 21.37m new shares to raise the same 500.0m. It issued 25.0m, so 3.63m shares, 2.91 per cent of the enlarged company, went to new investors for nothing. At the first-day close they are worth 85.0m, which is the same number reached the other way.
| Cost | Company | Selling shareholders | Total |
|---|---|---|---|
| Gross spread | 13.75 | 8.25 | 22.00 |
| Expenses | 9.0 | 0.0 | 9.0 |
| Underpricing | 85.0 | 51.0 | 136.0 |
| True cost | 107.75 | 59.25 | 167.00 |
| Share of proceeds | 21.55% | 19.75% | 20.87% |
Across the deal 81.4 per cent of the cost is uninvoiced. A 15 per cent greenshoe exercised at the offer price would add 6.0m shares sold at 20.00 and another 20.4m of underpricing; how the option works is in how a greenshoe option works.
| First-day return | First-day close | Underpricing, EUR m | True cost, % of proceeds | Uninvoiced share |
|---|---|---|---|---|
| 0% | 20.00 | 0.0 | 4.55% | 0.0% |
| 5% | 21.00 | 25.0 | 9.55% | 52.4% |
| 10% | 22.00 | 50.0 | 14.55% | 68.7% |
| 17% | 23.40 | 85.0 | 21.55% | 78.9% |
| 25% | 25.00 | 125.0 | 29.55% | 84.6% |
Each point of first-day return costs the company 5.0m, exactly one point of the proceeds, because every new share was sold at the offer price. Underpricing overtakes the whole invoiced cost at a first-day return of 4.55 per cent: the same figure as the invoiced cost in per cent, because both are measured against the same proceeds.
Treating the first-day close as the price the deal could have achieved. The 85.0m assumes the stock would still have closed at 23.40 had it been offered at 23.40, and it might not have: a tighter price leaves fewer investors with a gain to protect, a thinner aftermarket and possibly a smaller book. The figure is an upper bound on what a higher price would have raised, not a measured loss. The honest statement is the shares version: 3.63m shares were given up against the first-day price, and some part of that bought the after-market support the company wanted.
The opposite error is more common and larger: reporting the 4.55 per cent and stopping. A board that compares IPO banks on gross spread alone is comparing the smaller cost.
The same split of a deal's cost into the invoiced and the uninvoiced, and the counterfactual that is usually computed wrong, is what Capital Markets works through on an accelerated placement; the book's own case is in the free workbook for this case, and its placement arithmetic is in how much of a placement is uninvoiced.
The number of shares sold times the gap between the first-day closing price and the offer price. On 40.0m shares offered at EUR 20.00 that close at 23.40, it is 136.0m: 85.0m on the company's new shares and 51.0m on the shares sold by existing holders. It is an upper bound on what a higher price would have raised, not a measured loss.
To the shareholders who owned the company before the IPO. The company receives the offer price; the gap is a transfer of value to allocated investors. In the illustrative case the company had to issue 25.0m shares instead of the 21.37m that would have raised 500.0m at the first-day price, giving up 3.63m shares, 2.91 per cent of the enlarged company.
When the first-day return exceeds the invoiced cost as a share of proceeds. With a 2.75 per cent gross spread and 9.0m of expenses on 500.0m, the invoiced cost is 4.55 per cent, so any first-day gain above 4.55 per cent makes the uninvoiced cost the larger one. At 17.0 per cent it is 3.74 times the invoice.
This article is one calculation from Capital Markets. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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