Alibaba IPO size boosted after it took a walk in 'greenshoes'
A technique first used in 1963 allowed banks to buy 48 million more shares at original IPO price
When Alibaba increased the size of its initial public offering on Monday, it used a mechanism that was invented before any American president had visited China.
It was February 1963, and a US company called Green Shoe Manufacturing was readying a public offering, managed by investment bank Paine, Webber, Jackson & Curtis. It was a routine deal except for one provision: the underwriters had the option to increase the size of the offering by 15,500 shares.
Over the next 50 years, that mechanism - aimed at taking some of the underwriter risk out of the first day of trading - was used more frequently, and now it is part of most IPOs. The term "greenshoe" stuck, even if the company, Green Shoe, became Stride Rite.
In Alibaba's underwriting agreement, the banks were able to sell 15 per cent more stock to investors than they offered through the IPO. That greenshoe amounted to an extra US$3.3 billion in proceeds for the e-commerce company - worth more than any single IPO in the US since Facebook's 2012 offering.
Just like today, stocks in the early 1960s were on a roll, and regulators approved the greenshoe as a way of encouraging more companies to tap the public markets, said Richard Sylla, the chairman of the Museum of American Finance and a professor at New York University.
The term greenshoe never appeared in Alibaba's prospectus. The technique was instead called an "overallotment option". It gives the underwriters the ability to issue more shares than the original offering size.