The IPO Process A-Z

Step 1: Oversubscription and Allocation Ratio

The base offering is the primary and secondary shares placed before any over-allotment:

Base Offering = 10.0m + 5.0m = 15.0m shares

Oversubscription = 120.0m / 15.0m = 8.0x

Pro-Rata Allocation Ratio = 15.0m / 120.0m = 12.5%

Oversubscription is the single number the syndicate watches during bookbuilding, because it tells them whether the price can be pushed to the top of the range and how much aftermarket support the stock is likely to have. A book covered 8.0x at the €24.00 level means demand is deep enough that the banks can allocate selectively rather than pro rata, favouring long-only institutions who are expected to hold, over hedge funds expected to flip on day one. In practice almost no IPO allocates purely pro rata: the 12.5% figure is a benchmark, not a promise, and interviewers like to hear that allocation is a discretionary judgement about investor quality.

Step 2: Base Offer Size and the Split of Gross Proceeds

Base Offer Size = (10.0m + 5.0m) × €24.00 = €360.0m

Primary Gross Proceeds = 10.0m × €24.00 = €240.0m

Secondary Gross Proceeds = 5.0m × €24.00 = €120.0m

The primary / secondary split is the first thing an investor checks in a prospectus, because only primary proceeds reach the company's balance sheet and fund growth, deleveraging or acquisitions. Secondary proceeds go to the selling shareholders and change nothing about the business. A deal that is overwhelmingly secondary invites the question of why the owners are cashing out now, which is why most IPOs are structured with a visible primary component even when the company does not urgently need the money.

Step 3: Greenshoe Size and Total Deal Size

Greenshoe Shares = 15.0% (0.150) × 15.0m = 2.25m shares

Greenshoe Value = 2.25m × €24.00 = €54.0m

Total Deal Size = €360.0m + €54.0m = €414.0m (17.25m shares)

The greenshoe, formally the over-allotment option, lets the syndicate place up to 15% more shares than the base offering and then decide, within roughly 30 days, whether to buy those shares from the selling shareholder at the offer price or to buy them back in the market. Mechanically the banks are short 2.25m shares from the moment of allocation, and that short position is the tool that lets them support the price. Fifteen percent is the market convention in both Europe and the US, and a deal without a greenshoe is unusual enough that an interviewer would expect you to notice it.

Step 4: Stabilisation if the Shares Trade Below the Offer Price

The syndicate allocated 17.25m shares but only 15.0m existed in the base offering, leaving a short position of 2.25m shares sold at €24.00, worth €54.0m.

Using the average stabilisation price of €22.80:

Buy-Back Cost = 2.25m × €22.80 = €51.3m

Stabilisation Result = 2.25m × (€24.00 - €22.80) = €54.0m - €51.3m = €2.7m

Total Deal Size in this scenario = €360.0m (the greenshoe lapses unexercised)

This is the part candidates most often get wrong: the €2.7m is not a trading profit the banks keep. The buying is done on behalf of the offering, it is disclosed, and the economics flow to the issuer or the selling shareholder under the terms of the underwriting agreement. What the syndicate gets out of stabilisation is a credible defence of the offer price in the fragile first weeks of trading, which protects the bank's reputation with the investors it will need for the next deal. Note also the asymmetry: the greenshoe is only ever exercised when the stock trades above the offer price, so a fully exercised shoe is a signal that the deal went well.

Step 5: Net Primary Proceeds to the Company

With the greenshoe exercised in full, all 2.25m over-allotment shares come from the founding family, so the secondary tranche grows while the primary tranche does not.

Underwriting Commission on Primary = 4.0% (0.040) × €240.0m = €9.6m

Net Primary Proceeds = €240.0m - €9.6m - €6.0m = €224.4m

Secondary Gross Proceeds (with shoe) = (5.0m + 2.25m) × €24.00 = €174.0m

Underwriting Commission on Secondary = 4.0% (0.040) × €174.0m = €6.96m

Net Secondary Proceeds = €174.0m - €6.96m = €167.0m

Net proceeds matter because the headline deal size is never what lands in the bank account. Here the all-in cost of going public is €22.56m, or 5.4% of the €414.0m raised, and the company alone gives up 6.5% of its gross primary proceeds once the legal, audit, listing and marketing costs sitting inside the €6.0m line are added to the spread. European gross spreads of 3–4% are typically lower than the 7% that has long been standard for mid-cap US IPOs, and an interviewer may test whether you know that the fee is quoted on gross proceeds, not on net.

Step 6: Post-IPO Share Count, Market Capitalisation and Free Float

Only the 10.0m primary shares are newly created; the secondary and greenshoe shares already existed.

Shares Outstanding After IPO = 40.0m + 10.0m = 50.0m shares

Market Capitalisation = 50.0m × €24.00 = €1,200.0m

Free Float (base offering only) = 15.0m / 50.0m = 30.0%

Free Float (greenshoe exercised in full) = 17.25m / 50.0m = 34.5%

Free float is the proportion of the share count genuinely available to trade, and it drives two things a listed company cares about: index eligibility and liquidity. Most major indices, including the German MDAX and SDAX, apply free-float thresholds and weight constituents by free-float market capitalisation rather than full market capitalisation, so the difference between 30.0% and 34.5% can determine whether index funds are forced buyers of the stock. A thin float also widens bid-ask spreads and makes the shares harder for large institutions to build a position in, which is why bankers push issuers toward a float of at least 25–30% at listing.

Step 7: Lock-Up Expiry and the Share Overhang

Locked-Up Shares = 50.0m - 17.25m = 32.75m shares

Share of the Register Locked Up = 32.75m / 50.0m = 65.5%

Overhang Value = 32.75m × €24.00 = €786.0m

The lock-up is a contractual promise by the company, the pre-IPO owners and management not to sell for a defined window — 180 days is the standard in Europe and the US, though 90 or 360 days appear in specific situations. Its purpose is to stop the market being flooded immediately after listing and to signal that insiders are aligned with new investors. The flip side is the overhang: €786.0m of stock, more than double the entire base offering, becomes sellable on a single known date. Traders position for that date, which is why share prices frequently soften in the days before a lock-up expiry even when nothing about the business has changed.

Final Results

• Oversubscription of the base offering: 8.0x
• Base offer size / total deal size with greenshoe: €360.0m / €414.0m
• Net primary proceeds to the company: €224.4m
• Market capitalisation at the offer price: €1,200.0m
• Free float after full greenshoe exercise: 34.5%
• Shares locked up for 180 days: 32.75m (65.5%), worth €786.0m

These outputs feed directly into the next stage of the analysis: the €1,200.0m market capitalisation becomes the equity value in the enterprise value bridge used to benchmark the company against listed peers, the €224.4m of net primary proceeds changes the net debt position and therefore the pro-forma leverage the company lists with, and the free float determines the index treatment and the liquidity discount an investor might apply.

Would you like to explore how the analysis changes if the greenshoe shares were primary rather than secondary, or how the offer price itself would be justified against comparable listed companies before the range is even published?