Facebook IPO: Underwriters Fail to Prop Up DemandBy: Shawn Hess - May 22, 2012
After Friday’s botched Facebook IPO, where trading prices barely exceeded the $38 per share target price, things looked even worse yesterday. The market closed at just over $34 per share for Facebook. Now many banks offering the stock say they were bombarded with too many shares the day of the IPO.
According to the Wall Street Journal, it is common practice for many banks to ask for twice as many shares as they actually want in a big tech IPO like this, because the typical result is they get half as many as they ask for. In this case those banks actually got what they asked for and more. The sudden availability of shares had a devastating effect on some of the institutions involved.
An anonymous hedge fund manager commented to the Wall Street Journal:
“This has been a train wreck,”
The relatively large number of shares available combined with an increased per share price and a very recent reduction in forecasted revenue growth caused retail and investor demand to suffer greatly. Offering fewer shares at a 10% lower price could have made a dramatic difference in the performance of Facebook trading.
Michael Pachter, an analyst at Wedbush Securities comments on the Facebook IPO:
“The underwriters completely screwed this up,”
“should have been half as big as it was, and it would have closed at $45.”
As we reported earlier today, Morgan Stanley had some help from an allegedly suppressed reduced revenue forecast and may have actually bought up fewer shares of the stock to help boost the IPO than would normally be expected. This may have caused there to be even less demand by leaving more shares available, but earning them more in trading fees. Of course, none of Morgan Stanley’s approach during the IPO has been verified, so we are left wondering what exactly happened to cause the shares to perform so poorly.
We will be watching Facebook trading closely again today. Hopefully the market will close much closer to that $38 per share target price. Check back regularly for breaking news and updates.