Journal of Applied Corporate Finance

W I N T E R 1 9 8 9 V O L U M E 1. 4

The British Petroleum Stock Offering: An Application of Option Pricing

by Chris Muscarella and Michael Vetsuypens, Southern Methodist University

THE BRITISH PETROLEUM STOCK OFFERING: AN APPLICATION OF OPTION PRICING

by Chris Muscarella and Michael Vetsuypens, Southern Methodist Univerisity*

With the worlds economic health said to be banging in the balance, Britain announced that it would proceed with its offering of British Petroleum Co. shares....Never has a single stock offering so galvanized the attention of Wall Street, world capital markets and investors. Wall Street Journal, October 30, 1987 On October 30, 1987, less than two weeks after the stock market crash, the British Government proceeded with the largest stock offering in history. Over 2 billion shares of British Petroleum Company, with an aggregate value of over $12 billion, were offered for sale. The underwriters of the issue stood to lose millions of dollars because they agreed to the price of the firm commitment offering before the crash. These losses were greatly reduced, however, by a rescue plan under which the Bank of England would purchase shares at a floor price. The aims of this paper are two. First, we provide a case study of a complex and unprecedented equity offering, describe the institutional aspects of the underwriting process, and show how changing market conditions can affect the outcome of the offering and the welfare of the participants.1 Second, we demonstrate that the Bank of Englands repurchase offer amounted to a free grant to the underwriters of a very valuable put option on BP shares. We then use option pricing models to quantify the value of this put option to individual underwriters and compare such values to the changes in market values of the U.S. underwriters involved in the issue. By so doing, we are able to explain most of the changes in equity values for the U.S. underwriters on the day of the offering.
* We are indebted to Chris Barry for comments on a previous draft. Financial support was provided by the Center for the Study of Financial Institutions and Markets at SMU. 1. Numerous studies have investigated the effectiveness of equity offerings on common stock prices of the issuing firm. Most studies have found that the announcement of issues of seasoned equity has a negative effect on the issuers stock price. See, for example, Paul Asquith and David Mullins, Equity Issues and Offering Dilution, Journal of Financial Economics 15(1986), 61-89. See also Ron Masulis and Ashok Kotwar, Seasoned Equity Offerings: An Empirical Investigation, Journal of Financial Economics 15 (1986) 91-118.

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TABLE 1 DISTRIBUTION OF SHARES IN BP OFFERING (IN MILLIONS OF ORDINARY SHARES)

Fixed Price Offer U.K. Public Offer Shareholder Offer Total Fixed Price Offer International Offer United Statesb United Kingdom Japan Europe Canada b Total International Offer Total Offering

780 314 1,094

480 250 160 105 105 1,100 2,194a

a. Includes 459 million new shares issued by BP to the British government at a price of 3.30 to raise 1.5 billion in new funds for BP. The 1,735 million other shares were previously owned by the British government. b. Represented by Installment Payment American Depository Shares. Each ADS represents 12 ordinary shares

THE BRITISH PETROLEUM STOCK OFFERING History and Terms Based upon 1986 sales figures, British Petroleum is the worlds seventh largest industrial company and the third largest oil company. It is Europes second largest company, exceeded in size only by the Royal Dutch Shell Group. BP was formed in 1909 and the British Government acquired a 67% ownership status in 1914. Since then, the governments stake in the company has been gradually declining. At the beginning of 1987, only about 32% of all BP shares were owned by the government. As part of its denationalization program, Margaret Thatchers Conservative government decided in 1987 to sell the governments remaining equity stake in the company. On March 18, 1987, after the close of the London and New York stock exchanges, the British government announced that it planned to sell its remaining 31.7% stake in British Petroleum. The government still owned 1.735 billion shares of BP worth over $12 billion. As recently as September 1983, the British government had sold 7% of BP for about $900 million. On July 21, British Petroleum announced that it would raise l.5 billion ($2.4 billion) with the offering of new stock in conjunction with the British government sale. BP wanted to raise equity to retire some of the debt issued in May 1987 to finance the $8 billion purchase of the remaining 45% of Standard Oil shares

it didnt already own. Under the terms of the unusual combined offering, the British government would pay l.5 billion to BP for the shares and the new shares along with the British government-owned shares would then be offered immediately to the public. At that time, 93% of BP shares were held in Britain and 6% in the U.S., yet 60% of BPs assets were in the U.S. due to the acquisition of Standard Oil. In an effort to increase U.S. ownership, the British government announced on August 20, 1987 that over 20% of the BP shares would be allocated to foreign investors. This percentage would rise to nearly 50% by the time of the offering. On August 30 it was announced that the sale would take the form of two concurrent offerings. The fixed price offer would be for existing BP stockholders and British individuals. The international offer would be for British institutions and foreigners. More terms of the offering became available on September 17 when it was announced that the offer price would be at a discount to the current market value and that it would be payable to the British government in three installments. The installment payment method had been used in previous government sales of stock and was intended to make the offering more appealing to first-time investors. On September 28, a preliminary SEC filing revealed that Goldman Sachs would be the U.S. managing underwriter for 46,250,000 (this number would change by

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FOUR UNDERWRITERS WERE INCLUDED IN THE U.S. SYNDICATE. THIS NUMBER IS RELATIVELY SMALL COMPARED TO THE NUMBER OF UNDERWRITERS USUALLY INVOLVED IN LARGE EQUITY OFFERINGS WHERE THE LEAD INVESTMENT BANKER TYPICALLY WILL FORM AN UNDERWRITING SYNDICATE.

TABLE 2 DISTRIBUTION OF BP SHARES AMONG US. UNDERWRITERS

Underwriter

Number of Installment Payment Ordinary Shares Purchased

Number of Installment Payment American Depository Shares to be Sold

Goldman, Sachs & Co. Morgan Stanley & Co. Inc. Salomon Brothers Inc. Shearson Lehman Brothers Inc.

144,720,000 120,360,000 120,360,000 120,360,000 505,800,000a

12,060,000 10,030,000 10,030,000 10,030,000 42,150,000b

a. Four hundred and eighty million shares are from the British government holdings. The remaining 25.8 million shares represent new shares sold by BP. b. Each American Depository Share represents 12 ordinary shares.

the final prospectus) installment payment American Depository Shares (ADSs), each representing 12 installment payment ordinary shares2 The final terms of the firm commitment underwriting agreement were determined on Thursday, October 15, 1987. The offering date was set for October 30, 1987. The price of the offering was set at 3.30 (a 6% discount to the previous days closing price of 3.51) payable in three installments.3 A first installment of 1.20 was due immediately upon sale, 1.05 was due on August 30, 1988, and 1.05 was due on April 27, 1989.4 The final offering consisted of a total of 2.194 billion shares of BP. Table 1 shows that the offer was allocated almost evenly between the domestic and international investors. The U.S. underwriters were allocated about 22% of the shares being sold by the British government. Table 2 lists the US. underwriters and the number of shares they committed to purchase. For reasons that have not been publicly revealed, only four underwriters were included in the U.S. syndicate. This number is relatively small compared to the number of underwriters usually involved in large equity offerings, where the lead investment banker typically will form an underwriting syndicate of other investment bankers to spread the risk of the issue and help in the sale of the issue. It should also be noted that such underwriting agreements often have an escape clause that pro2. Technically, only American Depository Receipts (ADRs) trade on the New York Stock Exchange. Each ADR represents ADSs on deposit at Morgan Guaranty Trust Co. of New York. Each ADS represents 12 ordinary shares held by the London office of Morgan Guaranty Trust Co. (the custodian).

vides for the contract to be voided if the price of the security falls below some predetermined figure. No escape clause was included in the British Petroleum underwriting agreement. The Stock Market Crash The day following the underwriting agreement, the Dow Jones Industrial Average (DJIA) fell by more than 100 points. On the following Monday, October 19, 1987, the stock market suffered its largest decline in history. The DJIA dropped 508 points, or 22.6 percent. The stock markets throughout the rest of the world reacted similarly. On the London Stock Exchange, the price of BP shares dropped from 3.48 on October 15 to 2.83 on October 20far below the 3.30 price agreed to by the underwriters. On the NYSE the price of BP ADRs declined from $69.125 to $57.50 over the same 5-day period. As the offering date (October 30) drew closer, it became clear that the underwriters of the BP issue faced substantial losses due to the drop in BPs price. On October 26, the U.K. underwriters asked for a postponement or cancellation of the offering due to the losses faced by local and foreign underwriters. The U.S. underwriters faced potential losses of almost $555 million.5 The individual British underwriters losses, however, were unlikely to be as large as those facing the U.S. underwriters. Unlike their
3. This price ignores the time value of money. The true price is less than 53.30 given the proposed payment schedule for installment payment shares. The underwriting commission was about 0.035 per share. 4. The purchasers of the shares and not the underwriters are responsible for paying the second and third installments to the British Treasury in pound sterling.

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IN THE BP REPURCHASE OFFER, MR. LAWSON HAD, IN ESSENCE, GIVEN THE U.S. UNDERWRITERS A COSTLESS PUT OPTION BY GRANTING THEM THE RIGHT TO SELL THEIR BP SHARES TO THE BANK OF ENGLAND AT THE FLOOR PRICE OF 0.70

US. counterparts, the U.K. institutions had spread their risk among hundreds of sub-underwriters. On October 28, US. Treasury Secretary James Baker interceded on behalf of the U.S. underwriters and told U.K. Chancellor of the Exchequer Nigel Lawson that the offering could damage U.S. capital markets. Wood Gundy, the lead Canadian underwriter, anticipated huge losses should the offering proceed and Canadian Finance Minister Michael Wilson asked the British government to withdraw the offering. The day before the offering the rhetoric reached new heights. One Wall Street money manager was quoted as saying: We helped the British during the Falklands War, and we cant even get them to stop the underwriting (WSJ, October 30, 1987). On the other hand a former U.K. Treasury official said: Youve got to watch the Colonials. Theres a feeling that Americans cheat in these circumstances (WSJ, October 30, 1987). Some British bankers felt that the American investment banks should stand by their client, as Lloyds of London did after the 1906 San Francisco earthquake. The U.S. underwriters were finding that earlier indications of interest to purchase the BP ADRs were evaporating. Portfolio managers were backing off from previous commitments to purchase the shares. The widespread belief was that: There is absolutely no market for this stuff in the U.S. (WSJ, October 30, 1987). On October 29, 1987, after the close of both the London and New York markets, the Chancellor of the Exchequer announced that the offering would proceed as planned. He also announced that the Bank of England agreed to buy for 0.70, during the next one to two months, any and all partly-paid BP shares which would begin trading the following day. This repurchase plan was intended to be a safety mechanism that would provide the underwriters with an upper bound to their losses. Thus the British government, while not completely bailing out the underwriters, agreed to support temporarily the price of the issue. At the close of trading on the offering date, BP partly-paid shares were selling at 0.86.

THE BANK OF ENGLAND REPURCHASE PLAN In technical terms, the Bank of England repurchase plan is analogous to a put option. Put options are contracts between two parties, whereby one party (the buyer or holder of the put) has the right, but not the obligation, to sell a specified number of shares to the other party (the writer of the put) at a specified price (the strike price or exercise price) at, or before, the maturity date. The put holder will pay a certain amount of money at issue to the writer of the put for this right. The put holder will exercise his right only if the market value of the underlying shares has fallen below the strike price. The profit at exercise to the holder, if any, of course represents an equivalent loss to the writer of the put. Put options are familiar financial instruments to speculators, arbitrageurs and hedgers, and are widely traded on organized exchanges. In the BP repurchase offer, Mr. Lawson had, in essence, given the U.S. underwriters a costless put option by granting them the right to sell their BP shares to the Bank of England at the floor price of 0.70. Clearly, this pseudo-put is valuable because it protects the underwriters against further price declines in the value of BP stock. Finance theory provides us with a method to value such options known as the Black-Scholes formula.6 The Black-Scholes formula depends on five key input variables: the current price of the stock, the exercise price, the time to maturity, the level of interest rates, and the volatility of the stock. A detailed discussion of this formula is beyond the scope of this paper, but the essential properties of the model are easily explained. Other things being equal, a put option will be more valuable (a) the lower the current stock price (hence increasing the profit resulting from the difference between the exercise price and the stock price), (b) the higher the exercise price (for a similar reason as in (a)), and (c) the more volatile the underlying stock (and hence the higher the likelihood that the stock price will decline below the strike price). We

5. On October 26, BP shares closed at 2.65. (3.30 2.65) x (505.8 million shares) = 328.8 million or approximately $555 million. Because the underwriters had committed themselves to purchase BP shares at the offering price, these losses represent a corresponding windfall gain to the British government. It is frequently argued that a firm commitment underwriting contract provides the issuer with an insurance policy, because it implicitly gives the issuing firm the right to sell the shares to the underwriter at the offer price. Smith (1977) argues that the possible value to the issuer of this insurance policy is small. First, in a typical underwritten issue, the offer price is not set generally until within 24 hours of the offering. Hence, the effective duration of this insurance policy is very

short. Second, the offer price is set below the market value of the stock, limiting the uncertainty of the success of the offering. The BP offering is an extreme example where the conditions listed by Smith do not apply. Thus, the insurance policy value of the underwriting agreement to the British government was considerable. 6. See the article in this issue by Fischer Black, How to Use the Holes in Black-Scholes, which sets forth the formal Black-Scholes model. This model derives from Fischer Black and Myron Scholes, The Pricing of Options and Corporate Liabilities, Journal of Political Economy 81 (1973), 637-654. The interested reader is also referred to John Cox and Mark Rubinstein, Options Markets, Prentice-Hall Inc. (1985).

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THE BLACK-SCHOLES FORMULA DEPENDS ON FIVE KEY INPUT VARIABLES: THE CURRENT PRICE OF THE STOCK, THE EXERCISE PRICE, THE TIME TO MATURITY, THE LEVEL OF INTEREST RATES, AND THE VOLATILITY OF THE STOCK.

used this formula with data from U.K. financial markets to directly compute the value of the BP repurchase plan. We then compare this pseudo-put value to the actual change in the market value of the equity of the U.S. underwriters on October 30, 1987. If this put option has significant value, it ought to have resulted in an increase in the stock prices of the U.S. underwriters. (Only Morgan Stanley, Salomon Brothers, and Shearson Lehman Brothers were included in this valuation because Goldman Sachs is privately held.) We applied the Black-Scholes formula to the BP repurchase plan as follows: 1. Exercise price: The determination of the true exercise price is somewhat obscured by the installment feature of the newly issued BP shares. Strictly speaking, the Bank of England repurchase offer of 0.70 per share only applies to the first installment of Partly-Paid BP shares. As explained earlier, holders of Partly-Paid BP shares commit themselves to make two future installment payments of 1.05, the first on August 30, 1988, and the second on April 27, 1989. Combined with the first installment of 1.20 due at issue, this represents a total offering price of 3.30 per BP share. Tendering Partly-Paid shares to the Bank of England not only provides investors with a cash payment of 0.70 per share but also relieves them of the obligation to make the final two installments. Thus, the total exercise price implicit in the BP buy-back offer is the sum of (1) the cash payment of 0.70, plus (2) the present value of the second and third installments; the first term is the cash in flow at exercise, the second term represents the reduction in future cash out flows. Using UK interest rates taken from the October 31 issue of the Financial Times, we computed the total value of the exercise price as 0.70 plus 0.975 (the present value of the second payment of 1.05 using an annualized lo-month interest rate of 9.25 percent) plus 0.92 (the present value of the third payment of 1.05 using an annualized N-month interest rate of 9.25 percent), or a total of 2.595. 2. Current stock price: The closing bid price of BP shares on the London Stock Exchange on October 30, 1987 was A2.65.
7. The Bank of England buy-back plan technically resembles an American put option in that investors are free to exercise this option at any point in time during the next two months. (European options, on the other hand, can be exercised only at maturity.) Unlike American call options, it can sometimes pay to exercise American put options before maturity. The Black-Scholes formula does not allow for early exercise. Because an American put is always more valuable than a European put, the formula will tend to underestimate the value of the repurchase plan, 8. There is one problem with this number. The British government announced on October 30 that the BP repurchase offer would be valid for at least

3. Time to maturity: The Bank of England repurchase offer was announced October 29, 1987 and expired on January 6, 1988. Hence, the time to maturity was 69 days.8 4. Interest rates: The Black-Scholes formula requires as an input variable the annualized risk-free interest rate for a maturity corresponding to that of the put option. Using quotes from the Financial Times on October 31, 1987, we used an annualized two-month U.K. interest rate of 9.25%. 5. Volatility: By far the most difficult input variable to measure for use in the Black-Scholes formula is the volatility of BP shares. Unlike the other variables, it is not reported in the financial press. Volatilities can be computed using several different methodologies, and option values tend to be very sensitive to the choice of the volatility estimate. The most straightforward way to estimate a stocks volatility is to apply standard statistical techniques to historic stock price data. This procedure assumes that historic volatilities accurately reflect expected future volatilities. In Table 3 we report several estimates of the value of the put which correspond with different historic volatility measures. Using historic BP stock prices on the London Stock Exchange over the period June 1 through October 30, we estimated the volatility of BP to be 37.5%.9 This led to a put value per BP share of 0.124. This British Pound put value has an equivalent US. dollar value of $0.214 using the October 30 exchange rate of $1.722 per pound sterling. This corresponds to a total value to the three publicly traded U.S. underwriters of $77.3 million. Because equity markets have shown far greater volatility since October 19, 1987, historic volatilities based in part on pre-crash data underestimate the true future volatility. For instance, row 2 in Table 3, using only stock returns from 10/1/87 through 10/30/ 87, produces a higher volatility estimate of 60.2%, and correspondingly higher put values. Looking only at BP stock returns from 10/19/87 through 10/30/87 (row 3 in Table 3) the estimated volatility of BP becomes 84.9%. This number implies a total put value to the three U.S. underwriters of $207.5 million.
one, and at the most, two months. The buy-back offer did indeed last for the entire two months, but it is not clear whether this was fully anticipated on October 30. If the market initially expected the buy-back plan to last no more than one month, the correct time to maturity to use in the option formula should be 38 days instead. We computed that using 38 days instead of 69 days reduces the put value estimates in Table 3 by about 25 to 30 percent 9. The volatility is computed by taking the standard deviation of the continuously compounded annual rate of return on BP stock. See Chapter 6 of Cox and Rubinstein (1985) cited in note 6, for a complete example.

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AS AN ALTERNATIVE TO DIRECTLY ESTIMATING VOLATILITIES WITH HISTORIC STOCK PRICES, ONE CAN ALSO DERIVE VOLATILITY ESTIMATES IMPLIED BY ACTUAL OPTION PRICES.

TABLE 3 VALUE OF THE BP REPURCHASE PLAN FOR DIFFERENT ESTIMATES OF THE VOLATILITY OF BP

Volatility Estimation Method

Volatility Estimate

Put Value per BP Share (in pounds) (in dollars)a

Total Put Value to US Underwritersb

1 . Computed using historic BP stock returns from 6/l/87 through 10/30/87 2 . Computed using historic BP stock returns from 10/1/87 through 10/30/87 3 . Computed using historic BP stock returns from 10/16/87 through 10/30/87 4 . Implicit volatility derived from at-the-money BP options one day before the offering 5 . Implicit volatility derived from at-the-money BP options two days before the offering 6 . Implicit volatility derived from at-the-money BP options three days before the offering 7 . Implicit volatility derived from at-the-money BP options four days before the offering 8 . Implicit volatility derived from at-the-money BP options five days before the offering

37.5%

0.124

$0.214

$ 77.3 million

60.2%

0.225

$0.387

$139.6 million

84.9%

0.334

$0.575

$207.6 million

49.7%

0.178

$0.307

$110.7 million

47.8%

0.170

$0.292

$105.5 million

60.2%

0.225

$0.387

$139.6 million

52.5%

0.190

$0.328

$118.4 million

51.5%

0.186

$0.320

$115.7 million

a. We converted sterling into dollars using the exchange rate of $1.722 per pound sterling on October 30. b. The numbers in this column represent the dollar value of the BP repurchase offer to 3 of the 4 U.S. underwriters, and are obtained by multiplying the put values in the previous column by 361.08 million (the number of partially paid BP shares purchased by Morgan Stanley, Salomon Brothers and Shearson Lehman Brothers).

As an alternative to directly estimating volatilities with historic stock prices, one can also derive volatility estimates implied by actual option prices. Given the stock price, the exercise price, the time to maturity, the risk-free interest rate and the volatility, the BlackScholes formula implies a unique value for the option price. Turning the equation around, and using the observed market price of the option, we can solve for the markets estimate of volatility.
10. Implicit volatilities computed from at-the-money options produce the best estimates of future volatilities. (See Stan Beckers, Standard Deviations Implied in

Options on BP shares are traded on the London Stock Exchange. For each of the last five trading days before the BP offering, we computed the implicit volatility of BP by taking the average of the volatilities derived from at the-money BP options on that day.10 We obtained values ranging from 47.8% to 60.2%. These numbers are comparable with the estimates derived from historic data. Rather than picking one of these estimates as the correct one, we applied the
Options Prices as Predictors of Future Stock Price Variability, Journal of Banking and Finance 5 (1981), 363-382).

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ON OCTOBER 30, THE EQUITY VALUE OF MORGAN STANLEY, SALOMON BROTHERS, AND SHEARSON LEHMAN BROTHERS COLLECTIVELY INCREASED BY ABOUT $366 MILLION.

Black-Scholes formula to the BP buy-back plan for each of our different volatility estimates. The range of outcomes is reported in Table 3.11 The numbers in Table 3 represent estimates of the increase in the market value of the US. underwriters because of the Bank of England repurchase offer. The actual changes in the market values of equity of the U.S. underwriters, in fact, are entirely consistent with the estimates reported in Table 3. On October 30 (the day of the offering as well as the day of the repurchase announcement),12 the equity value of Morgan Stanley, Salomon Brothers, and Shearson Lehman Brothers collectively increased by about $366 million. Of this number, we estimate that about $115 million was due to normal, market-wide effects.13 The residual increase in value of about $250 million can potentially be attributed to the impact of the BP repurchase plan. In comparison, our estimates of the value of the repurchase plan explain between 31 percent and 83 percent of this number.14 Thus, while publicly stating that the British government would not bail out the underwriters of the BP offering, the repurchase plan increased the value of the U.S. underwriters by a significant amount. EPILOGUE The offering of BP shares was massively undersubscribed on the offering day. The U.K. underwriters were able to sell only 6.1% of their 1.0946 billion shares, while the international underwriters
11. Using financial data on BP shares trading in the U.S. financial markets yields similar results. 12. The announcement of the repurchase offer was made in London late in the evening of October 29, after U.S. equity markets had closed. (The announcement crossed the Dow Jones News Wire at 5:07 PM EST.) The effect of this announcement will be reflected in stock prices during the next trading day, October 30. 13. The stock market as a whole went up by about 3% on October 30, and we estimate that the 3 U.S. underwriters stock returns are slightly less risky (beta = 8) than the market portfolio. Thus, all other things constant, their equity values would have gone up anyway, in line with the market.

sold only 4 million (36%) of their 1.1 billion shares. Each of the four US. underwriters reported pre-tax accounting losses of between $75 and $80 million as a direct result of their participation in the BP offering. 15 Wood Gundy Corp., the lead Canadian underwriter, suffered after-tax losses equal to about 10% of its total capital. Perhaps partly as a result, First Chicago Corporation, which had agreed in June to purchase a 35% equity stake in Wood Gundy, canceled its proposed $200M investment. The price of BP shares never fell below the 0.70 Bank of England support price. In early November, the Kuwait Investment Office began buying BP partly paid shares. Kuwait had purchased almost 600 million of the partly-paid shares by mid-November. By the January 6, 1988 expiration date of the Bank of England buy-back offer, Kuwait owned over a billion of the partly-paid shares representing approximately 18% of the total outstanding shares of BP. The Bank of England did acquire about 39 million BP shares at the buy-backprice of 0.70 even though when the offer expired the shares were trading on the London Stock Exchange at 0.80. Thus, the big winner in the BP offering was the British government (and ultimately British taxpayers) and the big losers were the world-wide underwriters (although the Bank of England and Kuwait reduced potential losses). The final result of Kuwaits huge investment in BP is yet to be determined, although recent offers by BP to repurchase such shares suggest they will make handsome profits.
14. We also compared our put estimates with the actual change in the equity value of each underwriter separately. After correcting for market-wide effects, we found residual increases in equity values of $84 million, $114 million and $55 million, respectively, for Morgan Stanley, Salomon Brothers and Shearson Lehman Brothers on October 30, 1987. Using the lowest and highest per share put estimate from Table 3, we would have predicted that each underwriters equity value would increase by $258 million to $69.2 million. A significant fraction of the equity value changes for each underwriter individually is explained by our range of put values. 15. The U.S. underwriters proceeded to alter the price of the shares to reflect current market conditions. Each ADS was priced at $17.25, equivalent to 0.838 per ordinary share, which is considerably less than the 1.20 that the underwriters paid for them.

CHRIS MUSCARELLA AND MICHAEL VETSUYPENS

are Assistant Professors of Finance, Edwin L. Cox School of Business, Southern Methodist University. Their current research interests include leveraged buyouts and the pricing of initial public offerings.

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