Facebook IPO Goes Nowhere In Exciting Fashion

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What does this tell you?

The key facts are that 43mm shares of Facebook changed hands at $38.00, almost all of them at the bid, and another 28.5mm traded at $38.01, largely at the ask.* I am not really smart enough to interpret - humans and algorithms aware of the stabilizing bid may have thrown in their own bids at $38-even - but my best guess would be that the underwriters have eaten through half or so of the 63mm share Facebook greenshoe in stabilizing the deal at just about $38. So I seem to have lost my imaginary bet that the greenshoe would be exercised in full.

The greenshoe and stabilization are weirdly misunderstood; people cannot get over the idea that it is a prop position for the underwriters, meaning that if the stock reached $50 the underwriters would make a kajillion dollars on their 63mm share greenshoe option, while if instead it breaks through $38 in the wrong direction the underwriters would be long a lot of stock at $38. Nah. Morgan Stanley et al. sold 484mm shares for $38.00 last night, but only bought 421mm from Facebook. That left them with a 63mm short that they were hoping to cover at $37.582 (the price of the IPO and greenshoe to them) but that it sure looks like they've mostly covered at $38.00 - $38.01 today.

There are scenarios where the greenshoe and attendant stabilizing can be a prop winner or loser for the underwriters, where for instance they do some stabilizing below the IPO price (buying in their short below where they sold it), or where they use their own money to stabilize while holding some greenshoe firepower in reserve, hoping that the stock will recover and they'll make money on the prop bet while still being able to exercise the greenshoe. That may have happened here. But in general greenshoes are a nice illustration of banks being long-term greedy, trading the greenshoe on behalf of clients rather than lining their own pockets - which, here, would have involved allowing the stock to break the IPO price and then buying with a $37 handle to cover the greenshoe.

The real prop winners or losers on the greenshoe, though, are the people who signed up to sell into it (page 146): VCs and early insiders like Peter Thiel, Dustin Moskovitz, Sean Parker, Accel Partners and DST, all of whom are missing out on multi-hundred-million-dollar sales and will have to take their chances when their lockups expire in 3-12 months. Given the somewhat scraggly performance of the IPO, they may regret missing the chance to sell now at $38, though they can console themselves with the stupefying amounts of money they made on the shares they did sell (page 141).

For the underwriters, this still looks pretty much like an agency trade, one in which they made $176mm though the chances of clipping the extra $26mm on the greenshoe seems remote. Here's the split among the top underwriters:

So they're doing okay. Not entirely to be scoffed at is the fact that, besides placing the stock, they get to trade at least some of it - maybe not quite the way they'd hoped, but still. Those volume numbers above represent a record for an IPO, and mean that each Facebook share outstanding changed hands on average about one and a half times today.** If you take the 573mm shares that traded and assume (unjustifiably but whatever) that average revenues for these trades are 1.5 cents per share, you get about $8.6mm in Street-wide trading revenue for Facebook today - about one-sixth of the way to what SecondMarket made on Facebook in four years. Public equity trading may be a crappy business, but they make it up in volume.

The biggest loser, though, may be Nasdaq, whose hiccups earlier today seem to have sparked an SEC investigation, as all hiccups do. Even worse, they may have taken Nasdaq out of the running for a BATS listing. Because if you can't execute the biggest IPO you've ever done, you ... wait ... never mind.

Anyway, let us never speak of this again. Next week: Gupta trial!

Facebook Falls Back to IPO Price [WSJ]
Final S-1 [EDGAR]

* Or, if you like pictures, I have another one for you, which I have titled "Stock Returns Are Lognormally Distributed":

** Alternate metric for that $23bn worth of trading: one share of FB traded for every six likes & comments posted on Facebook today.

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