Why Is Going Public So Costly?

Markit Ltd. (ticker MRKT) sold 53.5 million shares on Thursday, June 19, at an offer price of $24 each, raising $1.28 billion. The company is a financial data provider with expertise in financial derivatives, including credit default swaps. Unusually, all of the shares came from existing shareholders, mainly investment banks that are also customers of Markit. At the close of trading, the stock was valued by the market at $27 per share, giving the offering a value of $1.45 billion. In return for selling the shares, the underwriters received a commission of 4% per share, or $51 million in total. In other words, Markit’s shareholders sold stock worth $1.45 billion and received only $1.23 billion for it, with investors and underwriters collecting the $220 million difference. To put this number in perspective, for the most recent fiscal year, Markit reported a pre-tax operating profit of $230 million. For Markit, going public ate up an entire year’s worth of pre-tax operating profits!