Greenshoe

An over-allotment option (including over- allotment option or over-allotment option) is an investment reserve of an issuer ( corporation) with an IPO as part of a book-building process. More specifically, it is a put option that the or the underwriters (lead underwriter ) grants the right to subsequently issue additional securities at the offering price. The English name comes from the same company (now the Stride Rite Corporation) that issued the first such papers.

Operation

If a new issue oversubscribed, so the demand for the shares to be issued is greater than the supply ( underpricing ), the parties to the IPO banks ( underwriters ) may submit additional securities on the same terms ( original conditions, same price as the first edition ), which already regularly issued shares were issued. Take in this case, a predetermined over-allotment option, so to speak, an additional reserve of securities wholly or even partly utilized. Goal of building and a later possible use of such a reserve is to meet the demand, and prices stabilized to avoid large fluctuations immediately after the equity issue. The over-allotment option may be exercised up to six weeks after an IPO, but it is usual for a period of 30 days. According to international standard is the over-allotment option 10 to 15 percent of the number of shares outstanding.

If, in the book-building process, a lack of demand, the over-allotment option is not honored. Redeeming the over-allotment option would be the issuance of additional securities which would mean increasing the offer and the price would thus fall further. This is in a conditional by the low demand already low price of course not wanted.

Structure of Green Shoes

In most cases there are the stocks that are placed in an IPO, mostly from new shares that arise in the course of a capital immediately prior to the IPO. The green shoe on the other hand is mostly pure of old shares that are provided by a Shareholder are available. In some cases, however, the allotment consists of new shares that are issued as part of an additional capital in the case of the exercise of the green shoe (or a mixture of the two types of shares ). However, the latter case has the consequence that price stabilizing activities are only limited feasible.

Hedging by Green Shoes

Another to be found in the practice nature of the use of the Green Shoes is the hedge against falling prices. The allotment in this case from a securities from a third shareholder who agrees to sell the shares in case of successful securities issue (similar to an inverted Open Offers ). The issuing company is now placed, the emission and the entire allotment that they are well received by the market in hope. Should this not be the case and the price falls sharply, has the caring for stabilization of Manager, within the legal time limit of 30 days, being able to buy back shares. In this case, they are then simply borrowed shares back, and has often made ​​by the positive difference between the offer price repurchase price stock borrowing a small profit.

Pros and Cons of Green Shoes

The added flexibility of being able to react to rising or falling demand for the shares in the short term, particularly is the advantage greenshoes. There is for the issuer and the banks supporting the possibility to place a maximum number of shares with a simultaneously enhanced risk buffer. Thus it can be announced placement (which is perhaps slightly overstated ) in the case of low demand simply to dispense with the exercise of the green shoe and thus will often still a " successful ".

If the allotment connected with the issue of new shares, there is by its exercise an appropriate dilution effect of other shareholders, which is often seen negatively.

Origin of the name

The name " green shoe " dates back to the American company Green Shoe Manufacturing Company of Boston, which made in 1963 as the first use of this method in the year.