Let’s disclose some conflicts of interest. I want to be all “go read this post from the NY Fed’s Liberty Street blog about the Facebook IPO greenshoe, it’s good, you’ll like it,” but I have this nagging sense that I’m mostly saying that because the New York Fed cited Dealbreaker, and what are the odds of that, so I want you to see it with your own eyes. But the post is fun, if you like this sort of thing, so, now you’ve got the recommendation and the disclosure, make your own call.1
Anyway the Fed researchers look at the Facebook IPO and the underwriters’ price stabilizing activity on its first trading day, Friday May 18. And they note, as I did, that there was a whole lot of buying at the IPO price of $38, which was probably largely due to the underwriters and which kept the stock above $38 going into the weekend before it cratered Monday morning. But they also note that there was a whole lot of buying at $40, which kept the stock above $40 for … 15 minutes.
A nice thing about IPOs is that they end: you work for months on pitching and executing a deal, you write hundreds of pages of documents, you embark on a roadshow with tiny planes and slovenly CEOs, you price the deal, you watch it trade on that first exciting day, and then you don’t do it any more. You and the company bask in the warm glow of a successful deal, and/or you avoid their phone calls in embarrassment about a bad deal, and then you give them some space before coming back and pitching them on the next piece of business.
Facebook is like the opposite: no bank involved in it can be in that much of a hurry to pitch the next piece of business, but the IPO itself will be relived over and over again for the rest of time. The latest is Citi’s angry letter to the SEC, responding to Nasdaq’s proposal to compensate market makers who lost money on the deal. Their preference is, uncharacteristically, to be compensated more, and they express that preference in the form of a litany of complaints about Nasdaq’s ineptitude and self-interest.
Or, as the Journalputs it, “English soccer club Manchester United’s stock didn’t rise much but didn’t fall either as it made its market debut Friday.”
This is not the first Friday afternoon where we’ve played “guess the stabilization strategy of an overhyped IPO,” which, God, we need to find something better to do with our Friday afternoons. Last time it was Facebook, and we noticed some things, like that about 43mm shares had traded right exactly at the IPO price, and like that almost all of them traded at the bid. We guessed at the time that most of those shares had been bought by the underwriters, eating into the greenshoe that allowed them to support the deal. But since that greenshoe was 63mm shares, they started the weekend still short some 20mm shares – and when Facebook opened way below the IPO price on Monday, they made shitloads of money.*
Jefferies et al. are determined not to repeat that mistake:** Read more »
Why don’t we talk abstractly about greenshoes for a while, because for some reason some people want to talk about them and hey, why not, they’re a thing. In talking about greenshoes, though, we are not going to use the F-word, because I swore to myself that last week was the end of that. We’re just going to talk about greenshoes. Greenshoes.*
Let’s start with a very basic thing about greenshoes, which is that they make no sense! If you are a company, or an executive or investor or whatever in a company, and you want to raise money and/or sell your shares, here are things that you could want:
(1) to raise $100 million
(2) to sell 5mm of your shares
Here are things you are unlikely to want:
(1) to raise $100 or $115 million
(2) to sell 5mm or 5.75mm of your shares
Obvs, no? Keep in mind that, when you launch the deal, you don’t know exactly what price you’ll get – you’ll just have a range – which is an annoying enough uncertainty. Throwing in the additional binary that you’ll get either an uncertain $X or 115% of $X seems a bit much. So here is what happens when a naive company comes to an underwriter: Read more »