Institutional Sales and the Initial Public Offering

Equity sales and capital markets cooperate to sell and distribute an initial public offering to the buyside.  Institutional sales gets involved after the preliminary prospectus has been filed and approved by the SEC.  As part of the daily morning call, capital markets will hold a kick-off meeting between the issuer company's management, the covering research analyst, the sales force and traders.  From that call, research salespeople and salestraders will notify their clients of the deal and gauge possible interest in the IPO.

The IPO is marketed to interested clients through a roadshow run by capital markets.  Here, the issuer company's senior management will present their business plan, future prospects, market position, etc. to the buyside.  This will be a grueling death march for 3-4 weeks where they will travel all over the place to meet with portfolio managers, research analysts and traders.  At a minimum, they would go to New York, Greenwich, Boston, Philadelphia, Chicago, Houston, Los Angeles and San Francisco.  If they wanted to sell shares to European firms, then London, Paris, Frankfurt, Amsterdam, Madrid, Milan, Geneva and Zurich would be added to the itinerary.  While the roadshow is progressing, the sales force is gathering the buyside's indications of interest, their pricing expectations and the number of shares desired.  Sometimes, the buyside firms commit to buy additional shares in the aftermarket if their order is filled.

The terms of the deal will influence how aggressively a deal is marketed by the sales force.  A deal with a fixed allocation of shares will not be promoted heavily.  For example, the distribution of shares for a deal may be 60%/40% between Credit Suisse and Morgan Stanley.  Since this is guaranteed for both firms, the sales force will not be as excited as for a deal with a flexible allocation.  For example, a deal may be allocated 50%/40% with a 10% jump ball.  In this case, the first firm may get as much as 60% of the sales concession if they sell it aggressively enough to their clients.  When the IPO's orders are being filled out, the buyside firm will tell the managing underwriter the number of shares to credit each bank.  In all cases, the sales force will be more excited when their bank is the bookrunner as a majority of the selling concession is headed their way.

The night before the offering date, the issuer company, sales management and capital markets meet to set the price and number of shares in the deal.  Sales management and capital markets also set the final allocations to the buyside.  The capital markets trading team stays in the office very late to process them.  Then the stock is distributed to the investors and begins trading the next day.  If there are any selling order imbalances, the position traders assigned to the IPO must step in and stabilize the price.  In the months following the offering, the lead underwriter's traders provide liquidity by making a market on the stock.