China Telecom underwriters in the money
The investment banks that handled China Telecom's US$1.39 billion share offer did a pretty good job in stabilising the share's performance in the month after the listing - keeping it trading at about 5 per cent below its HK$1.48 issue price.
The banks, which announced on Sunday that they had issued an extra 471 million shares as part of the exercise of their 15 per cent over-allotment option, emerged the winners in the deal, having turned it around from a difficult start.
What was unusual about Sunday's announcement was the placing of more shares in a market that is hardly filled with eager takers for China Telecom stock.
The answer lies with the over-allotment provision, or what professionals call the green-shoe option.
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One fund manager said China Telecom had been treated badly by its underwriters.
"The underwriters charged a lot for underwriting but weren't taking the risk to underwrite the shares if there was insufficient demand," the fund manager said.
An over-allotment option is actually a way for the underwriters to ask the company to grant them a call option, allowing them to demand more shares during a rising market.
And once again, it allows them to make more money without taking any risk. If the share price is above the issue price, underwriters can ask the company to issue more shares while they earn more commission. If the price is down, they buy shares at a lower price and gain the spread.
Either way, underwriters lose nothing.
What did I say then?
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