IPO University

An acronym that stands for "growth at reasonable prices". This is a popular investment style that blends elements of growth and value investing. The goal of GARP investing is to buy fast growing companies and market leaders at valuation levels that can be justified by company fundamentals and expected future returns.

A typical underwriter agreement allows the underwriters to buy up to 15% in additional shares at the offering price for a period of several weeks after the offering. This option, also called the overallotment, is available if the deal is oversubscribed, and is always exercised if the IPO had strong positive trading. The ability to buy additional shares also allows underwriters to manage aftermarket trading. The term comes from the Green Shoe company, which was the first to have this option.

When you purchase an IPO at the offer price, you pay no commission. Instead, the underwriter charges the issuing company a gross spread, which is the difference between the public offering price and what the issuing company received. Typically, this spread is 6% to 8% of the IPO's offering price, though it can be as low as 2% to 4% for large offerings. For Alibaba, the underwriters took home a 1.2% gross spread, which amounted to $261 million. The gross spread is composed of a management fee, an underwriting fee, and a selling concession, typically at a split of 20%/20%/60%. The profitability of doing IPOs is one important reason why investment banks focus on developing this business.

When underwriters allocate the overwhelming bulk of IPO shares to a small group of large investors or an investment bank's best clients. Usually indicative of both high demand from big investors and the desire of the issuer and banker to restrict distribution to a more knowledgeable and stable investor base.