SpaceX raised a
record $75 billion in its IPO on Friday after selling about 5%
of its outstanding shares, but it could raise even more under a
provision designed to keep trading smooth in the first few weeks
after a company goes public.
The company’s initial public offering includes a so-called
greenshoe option, a standard feature of most large U.S. stock
market listings that acts like a safety valve that keeps the
stock price from going crazy one way or another in its first
month of life.
SpaceX gave Morgan Stanley, which is acting as the
stabilization agent for the company, the option to purchase an
additional 15% of its stock at the IPO price of $135 a share for
up to 30 days – or about 83 million in additional shares on top
of the 555.6 million SpaceX already sold.
Those additional shares, however, haven’t been issued by the
company yet, so the bank has to effectively sell them on the
open market through a short position and buy them from the
company later.
The process begins before trading starts. Underwriters
typically allocate and sell up to 15% more shares than are
initially being offered. In SpaceX’s case, that means investors
could ultimately receive as many as 638.9 million shares if the
option is exercised in full and an additional $11.2 billion in
capital for SpaceX.
The mechanism serves two purposes: it gives underwriters a
way to support orderly trading and provides issuers with the
opportunity to raise up to 15% more capital if demand proves
strong.
The direction of the stock determines which path they take.
GREENSHOE HISTORY
The greenshoe option, formally known as an over-allotment
option, takes its name from Green Shoe Manufacturing, the first
company to use the structure in its 1960 IPO. It remains the
primary mechanism investment banks use to help manage volatility
in newly listed stocks.
In 2014, Alibaba fully exercised the greenshoe option in its
IPO to keep shares from skyrocketing. The Chinese e-commerce
giant priced its shares at $68, but overwhelming demand pushed
the stock to a 38% gain above the IPO price on their first day.
As a result, underwriters exercised the full 15% greenshoe
option, purchasing an additional 48 million shares directly from
Alibaba at $68 to cover their short. The move increased total
proceeds raised to about $25 billion, making it the largest IPO
in history at the time.
Uber’s IPO in 2019 didn’t go as well. It priced at $45 but
quickly fell below that level as investors balked at the
company’s path to profitability and broader market weakness.
Because the stock was trading below the IPO price, it made
little sense for underwriters to buy additional shares from Uber
at $45. Instead, underwriters purchased shares in the open
market to prop up the stock. That helped moderate selling
pressure, though the stock still fell 7% on that first day.