Primary issuances are defined as the first public issuance of stock that a company conducts in order to raise equity funds for its operations. Prior to the issuance, a deep dive analysis of the company is done to create a reliable picture on what the company is worth at that point in time. Working with the investment bank, the company raising the equity capital looks to ensure that it is receiving as much capital as possible by selling as little shares as possible. However, there are times when the efforts of the investment bank and the company do not align with market perception of the stock. In this scenario, the market may either drop the price of the stock after trading or increase it to a level that is significantly higher than what management had floated it for initially. It is this latter movement that is colloquially known as “leaving money on the table” wherein management could have issued it at a higher price to gain advantage of the extra capital that could be raised.
For a company, leaving money on the table after a primary issuance is a pain point largely due to the fact that the extra capital could have gone directly on the company’s balance sheet instead of the shareholder’s pockets. While in theory, the two parties’ interests should be aligned, the practical scenario dictates otherwise. Firstly, there are a large amount of speculators on the market during an IPO. These speculators operate purely to make arbitrage profits or other short-term plays that net them an adequate return. Events such as an IPO and upcoming M&As are prime targets for these speculators who will buy the stock and sell it in a short time period. In this case, the company’s interest and the shareholder’s interest is not aligned as the speculator was never intending to be a long term shareholder. Secondly, the company generally uses the capital raised from a primary issuance to fund expansion and/or other positive Net Present Value (NPV) projects. Therefore, there is an inherent opportunity cost there wherein those incremental projects can be undertaken due to the mispricing of the shares listed.
There are some caveats however. Particularly in industries with high growth, new offerings are viewed with a substantial level of excitement, however when they flatter to deceive, the value can get eroded very quickly. A good example of this is the company Groupon which worked with investment bankers to arrive at a listing price of $20 per share. Over the course of the day, doubtless aided with some speculation, but also the beneficiary of highly optimistic expectations, the company had risen up to $31 – representing a 55% jump over the listing price. Less than a year later however, shares were down to $5. The initial jump that the company witnessed in its stock price is a prime example of money being left on the table where they could probably have listed the shares at a higher price point ($25 – $27 perhaps). However, this is also a good example of the argument that just because a company jumps on its initial trading day, it isn’t necessarily reflective of strong underlying fundamentals.
The term “money left on the table” is used a lot in investment banking circles to express regret over an equity capital markets transaction where the listing price could have been juiced up higher to attract more capital into the company’s balance sheet. During the dot com bubble of the early 2000s, there were several companies that were the victims/beneficiaries of the phenomenon as investors had highly unrealistic and inflated expectations of growth in the technology industry. However, as the dot-com bubble also shows, these expectations are sometimes unfounded, meaning that adequate research into a company’s underlying fundamentals and likely growth trends needs to be completed before subscribing and buying into stocks that have left money on the table.
