the peculiar Birkenstock (BIRK) IPO


About a week ago, BIRK went public by selling around 37 million shares at a price of $46 each. Despite an all-star list of underwriters, led by Goldman, JP Morgan and Morgan Stanley, the stock opened at $41, quickly peaked at $42.51 and fell throughout the day. The stock closed at $40.20 on volume of 15 million shares, and has drifted a bit lower since.

So buyers in the IPO are down about 10%, so far.

This bare-bones account is all I’ve seen in the financial press, leaving unanswered two obvious questions:

–how is it that the underwriters did such a bad pricing job for investor clients/unusually good job for the private equity seller? According to the prospectus, the latter group paid an average of $17.51 for its shares about two years ago. Easy to ask in hindsight, but what drove institutional investors to go along with this and agree to $46?

–what happened to the overallotment? The share sold by the underwriters break out as follows:

—10.2 million new shares being issued by BIRK

—21.5 million existing shares being sold by the private equity owners, and

—4.8 million overallotment shares.

In this case, the underwriters placed 36.5 million share with buyers, 4.8 million of which are the over-allotment. The underwriters have commitments from clients to buy the 4.8 million at the offering, but they don’t actually receive the shares from the issuer as trading opens. They only have a promise by the issuer to supply them at $46 each, if needed.

During the initial trading day, the underwriters aim to “stabilize” the stock price at or above the IPO level. They enter the market to absorb any selling at or below the offering price, intending to deliver the shares to IPO buyers, until they’ve reached the overallotment amount disclosed in the prospectus–in this case, the 4.8 million . If the issue is a rousing success, the underwriter does nothing and gets the extra shares to deliver to clients from the issuer. If it’s a bust, it absorbs some of the selling pressure by buying in the market–and delivers these shares to IPO buyers.

What’s unusual about this case is that there’s no clear evidence I can see that the underwriters did much to try to hold the stock at the offering price. Was there was a tsunami of selling on Tuesday morning by the same buyers who agreed to $46 on Monday night? or were short-sellers licking their chops at the thought of buyers’ significant misjudgment?

Nothing in the financial press that I could see, other than that the offering didn’t go as planned.

asking AI

…which told me, referencing Forbes and the Motley Fool (far from A+ sources, in my view), and without much more elaboration, that the offering price was too high and that there were more sellers than buyers.

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