It is always nice to get a warm "welcome back" when you've been gone a long time. Last month, investors welcomed back Boise Cascade to the financial markets.
After an initial public offering led by Bank of America Corp. and Goldman Sachs Group Inc., Boise Cascade trades again on the New York Stock Exchange. The company is smaller than before, but the stock is doing well.
Boise Cascade Co. (the stock symbol is BCC) sold more than 13.5 million shares to the public at $21 per share. The stock sold at the first-day open for $25.44, a 21 percent premium and quickly rose to more than $27 by the end of the week.
The company's successful IPO is part of positive trend this year. It's common for more IPOs to be offered when the overall market is rising. With the stock market reaching new highs, expect the trend to continue.
But investors don't like everything that comes to market. In one of the most anticipated IPOs ever, Facebook Inc. debuted last May at $38 on the Nasdaq exchange. Facebook sold more than 400 million shares to the public, but the bankers got the company valuation wrong.
The Facebook IPO was well overpriced. Today, the stock sells for nearly a third less.
More often, it works the other way around. IPOs are usually underpriced, as in the case of Boise Cascade. You could say the underwriters got it wrong by not pricing BCC's stock high enough.
So why do companies use an IPO underwriter when they can't get the price right? Because investment banks make it easier on the new company and perform an important functions for the market overall.
First, investment banks help the issuing company fulfill all legal requirements. This would be costly and time-consuming otherwise.
Second, they buy all the newly issued shares from the company so that the business knows exactly how much new capital it is raising.
Third, the bankers sell these new shares to the investing public so that the company can get back to its own business.
For all these services. the underwriter earns a "spread" or commission.
Both the Facebook and Boise Cascade offerings were made under what is called a firm commitment, where the underwriter pays a fixed price to the company selling the stock, and then sells the stock to the public for, hopefully, a higher amount. The difference (spread) amounted to 1.1 percent or about $176 million in the Facebook sale.
The less-hyped IPO for the lesser-known Boise Cascade was more expensive.
BCC reports that it received from the IPO proceeds net of underwriters' fees and expenses of $262.9 million. The underwriters then sold the 13.5 million shares for $21 per share, or about $284.1 million. The difference of $21.2 million in fees amounts to a 7 percent spread.
Add to the underwriting spread the underpricing of 21 percent on the first day of trading, and the cost of Boise Cascade's new capital rises substantially. If the spread had been smaller and the offering price closer to market expectations, the company would have another $70 million or so in capital to invest in its business.
It's great to have Boise Cascade back on the stock exchange, but becoming a public company can be an expensive transaction.