Goldman v. eToys - IPO Underpricing
This is few days old but still pretty fresh nonetheless.
NYT had an article last Saturday about the (amazingly still ongoing) lawsuit filed against Goldman by eToys, a internet startup that went bust during the dot-com bubble. On the day of its IPO, eToys' stock shot up, nearly quadrupling the $20 offer price and ultimately closing at $77. GS was the lead underwriter of the IPO, and the lawsuit alleges that Goldman deliberately set the price low with the assumption that it would skyrocket. After essentially robbing eToys of hundreds of millions in capital, GS then allegedly asked their buyside clients to throw them a bone and return some of the profits in the form of commissions. Goldman is fighting back, claiming that eToys is distorting what actually occurred, and also arguing that banks are under no fiduciary duty to maximize profits for the companies they are underwriting.
So, any thoughts on this situation? Was a ridiculous first day pop just an inevitable result of the dot-com hype? Or is this a deliberate manipulation by Goldman to serve its own ends? Is Goldman's argument legally (or logically) sound? (Apparently the New York court system thinks so.) Does anyone think the outcome of this lawsuit is going to have a significant impact on future IPOs?
Here's the link to the original NYT article: http://www.nytimes.com/2013/03/10/opinion/sunday/nocera-rigging-the-ipo…
It's a tough argument to make given how insane everything was priced during the boom. I'm sure eToys wasn't the only IPO during the tech boom to quadruple on opening day. I believe eBay tripled on its first day.
Obviously it was deliberate. Goldman is the house and the house always wins. They play both sides, and favor whichever side is more profitable to them. Look, the capital markets is about extracting as much value as possible from other participants, and GS is basically the toll booth. There was another article -- might have been Felix Salmon -- that laid out the math for why it was more profitable for GS to under price the IPO even though they left some money on the table with underwriting fees (lower 7% against the value of the deal) because they made it up in trading commissions.
Same game still happens. Firm I work for rarely participates in IPOs but we got in on a hot one from Goldman late last year -- my job was to write a thesis about how undervalued the IPO is and talk about what long-term holders we would be so that we would get some allocation. I made up a bunch of bullshit and we flipped the stock the same day. My boss made a couple of million dollars for about an hour's worth of work.
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