Elon Musk's aerospace company, SpaceX, raised a staggering $75 billion by selling 555.6 million shares, representing about 5% of its stock, during its highly anticipated market debut on Friday. However, the company could potentially raise billions more in the coming weeks.
Greenshoe Option Explained
A mechanism known as a greenshoe option grants Morgan Stanley, the stabilization agent for the listing, the right to purchase additional SpaceX shares at the IPO price of $135 per share for up to 30 days after trading begins. If fully exercised, the bank could acquire approximately 83 million more shares from the company.
This would increase the total number of shares sold to 638.9 million and boost the amount raised by an additional $11.2 billion, according to a Reuters report.
How the Greenshoe Works
Unlike the shares already offered to investors, these additional shares have not yet been issued by SpaceX. Instead, underwriters first sell the stock through a short position in the market. They can then either purchase the shares from SpaceX at the original offer price or buy them back from the open market, depending on how the stock performs.
The route taken largely depends on the share price movement after the listing.
Impact of Stock Performance
If a stock trades above its IPO price, underwriters can exercise the greenshoe option and purchase the extra shares directly from the company. This allows the issuer to raise additional capital while covering their short position. Strong investor demand can therefore translate into a larger fundraising haul for the newly listed firm, as reported by Reuters.
If the stock falls below the offer price, underwriters are more likely to buy shares in the open market instead. This helps them close out their short position while supporting the stock and reducing volatility during early trading.
History of the Greenshoe Option
The greenshoe, formally called an over-allotment option, has been used in major public offerings for decades as a tool to promote more orderly trading. Its origins trace back to Green Shoe Manufacturing, which became the first company to employ the structure during its 1960 IPO.
Its use has shaped some of the world's most prominent listings.
Notable Examples
- Alibaba's 2014 IPO: Soaring demand pushed the stock 38% above its $68 offer price on the first day. Underwriters exercised the entire 15% greenshoe option, purchasing an additional 48 million shares from the company at the IPO price. This boosted total proceeds to around $25 billion, making it the largest IPO on record at that time.
- Uber's 2019 IPO: After pricing shares at $45, the stock slipped below that level due to concerns over profitability and market weakness. Underwriters bought shares in the open market to ease selling pressure, but Uber's shares ended the first trading session 7% lower.
What's Next for SpaceX
For SpaceX, the next few weeks will determine whether its landmark IPO remains a $75 billion fundraising event or grows even larger through the exercise of the greenshoe option. Investors and market watchers will closely monitor the stock's performance to see if the company can replicate the success of Alibaba or face challenges similar to Uber.
