Wednesday, June 27, 2007

Blackstone and the Green Shoe

by Calculated Risk on 6/27/2007 12:28:00 PM

Blackstone is now trading below the IPO price of $31.00 per share (last quote was $29.99).

When a deal is sold, the underwriters (the lead underwriters for Blackstone were Morgan Stanley and Citigroup) actually sell more shares than the amount raised by the company. Blackstone sold 133.3 million shares raising $4.13 Billion, and for this deal, the overallotment was 20 million shares, meaning the underwriters raised an additional $620 million - and they put the money in what is called the "Green Shoe".

For most IPOs, the underwriter exercises the overallotment option after some waiting period, and the entire amount in the Green Shoe goes to the company. But if the stock falls below the initial price, the underwriters start buying back stock using the cash in the Green Shoe. This usually sets a floor for the price of the stock, at around the IPO price - just for the overallotment period.

Since the current stock price is below the IPO price, the Green Shoe is probably being spent right now to support the stock price. We will know how much was spent in a couple of months when (if) the overallotment option is exercised.

IMO, the Blackstone IPO probably marks the peak of the PE LBO wave. And if the stock price stays below the IPO price, the company will jokingly be called Blackpebble (or something far worse).