Dealing With Post-Secondary Offering Depression

Also, another round of Where on the Web?
Publish date:

First up this week is

John Lippman

, who writes: "I recently participated in the


(EBAY) - Get Report

secondary offering, which brought up a question. The secondary was priced at $170 per share, even though the stock closed at approx. $177 per share that afternoon. Why the difference? Should I be happy I got a bargain, concerned about the need to undercut the market price, or neither?"

Take the money and run, you big worry wart.

First, a bit of terminology: Subsequent to the IPO, offerings in which the issuing firm receives sale proceeds are called "primary offerings." Strictly speaking, secondary offerings refer to offerings whose proceeds go to specific investors, often company insiders, who are trying to unload their stock. eBay's recent 6.5 million share offering was a combination of a primary and a secondary, with 4.25 million shares sold by eBay and 2.25 million by company officers and directors.

In the short term, worrying about getting a secondary offering at a discount to the market is like worrying about what to do with the mind-boggling paper gains you'd have accrued had you gotten in on the ground floor of eBay's IPO. Granted, there's a


difference in degree between both sides of that analogy. But not in kind. Investment banks are forced to follow the same basic logic when pricing all offerings, whether initial and subsequent.

The underwriter has two sets of clients to satisfy: the sellers, which in eBay's case include insider investors and the company itself, and the buyers, which typically include institutional investors and really rich people, as well as some small investors whose retail brokers have access to the syndicate. Naturally, both sides want to make money, the one by selling at the highest possible price, the other by buying as cheaply as it can.

Underwriters perform this balancing act when pricing both IPOs and subsequent offerings. The difference is that in a subsequent offering, there's a benchmark more persuasive than any valuation model could ever be: the market price. The lead underwriter in a secondary has to price the deal at a discount significant enough to stir up investor interest. After all, who'd want to pay more than the market has already shown it will bear?

No one, of course -- the same number of people you might think would be willing to sell their shares at a discount. But while there's no law that says secondaries have to go through an underwriter, sellers accept the discounted price as a trade-off for the stability an investment bank provides. Think $170 a share was low? Imagine what would happen if 2.25 million shares hit the market pell-mell. The prospect of the uneven execution that could arise from a disorderly market sends insiders to the bankers, who can guarantee a price for the whole block.

I wouldn't worry about the spread between the secondary and market prices. Consider it a factor of a volatile stock's risk premium. And it's a testament to the resilience of eBay that it rose about 22% since it announced that secondary offering, which was absolutely massive, nearly twice the size of its IPO.

Anyway, there are so many other things to worry about in the Net sector.

Message Center

Memo to

Peter Woll

, who wonders where on the Web he can find intraday updates of advance/decline data: Thankfully, there are a ton of places that offer this info. Try



huge playground of stock information.

Memo to

Guy Whitson

, who, after watching the recent resurgence of cyclical stocks, wants to know what the heck are cyclicals in the first place, and where on the Web he can find a list of them: I take it you like tech stocks, Guy. As

Mick Jaggar

once said, you can't always get what you want. Cyclical stocks are simply stocks whose businesses are sensitive to economic fluctuations, like the auto (new cars being a relative luxury in hard times) and construction industries (as housing starts fluctuate along with interest rates). By contrast, people always tend to need food, pharmaceuticals and insurance.


Morgan Stanley Cyclical Index

is the most widely used index of these stocks. You can find

a list of its components on the Nasdaq Web site; you can also trade options on the index on the Nasdaq under the symbol CYC.

And be sure to hurry if you want to go long the CYC, Guy. The cyclical rally is already starting to look a little peaked.

Memo: Have a dumb question relating to finance? Great. Have a problem with something I've written? Let me know at, and I'll do my best to answer every Saturday. Include your full name, and please, no questions seeking personal financial advice or regarding personal brokerage disputes. And this reminder: Because of the volume of mail, personal replies can't be guaranteed.