Facebook Banker Morgan Stanley Bought A Humongous Amount Of Stock To Try Support Price
May 19 (
Bloomberg) --
Morgan Stanley, the lead underwriter in
Facebook Inc.’s initial public offering, stands to take a hit from a stock market debut that stoked disappointment among investors in the largest social network.
The bank stepped in to prop up the stock from dipping below its $38 IPO price yesterday, said people with knowledge of the matter, who asked not to be identified because the purchases were private. Morgan Stanley, based in New York, was the only underwriter among Facebook’s 33 banks with the responsibility to support the shares, the people said.
Underwriters “are acting like the cavalry to keep this thing going up,” Eric Jackson, founder of Ironfire Capital LLC, said in an interview on Bloomberg Television’s “Street Smart.” “They’re not going to be here a week from now, two weeks from now, a few months from now. It does suggest that there are going to be some rocky waters ahead.”
Days before the sale, Facebook and Morgan Stanley decided to bump the offering price range to one with $36 as a midpoint to persuade the company’s backers to sell more of their stock, one of the people said. Facebook and the bankers knew pre-IPO investors were willing to sell more, though not at the initial midpoint range of $31.50 a share, the person said. Goldman Sachs Group Inc. and Accel Partners were among backers that decided to sell additional shares in the IPO.
The IPO price, at the top of the increased range, prevented a first-day pop in the shares, which advanced 23 cents to $38.23 yesterday.
“It does indicate that investors are conscious of the risk, that the revenue model is still unproven, that operating costs are high and rising,” said Brian Wieser, an analyst at Pivotal Research Group LLC with a $30 price target on Facebook. “Those factors are weighing on the investors. The stock is greatly overvalued.”
Crossed Quotes
The debut was also marred by glitches at the Nasdaq Stock Market, where initial pricing of the first transaction was pushed back by a half-hour amid delays in trade confirmations, crossed quotes and signs that orders were mishandled.
Facebook executives and bankers met on May 17 to discuss the final IPO price, people familiar with the matter said. Among the underwriters, Morgan Stanley was the main bank handling pricing, the people said. Some co-managers of the offering advised Morgan Stanley against expanding the sale and price range because their clients’ demand didn’t support the move, two people said.
Pen Pendleton, a spokesman for Morgan Stanley, declined to comment. Jonathan Thaw, a spokesman for Menlo Park-based Facebook, declined to comment.
Market Value
Facebook raised $16 billion in the IPO selling 421.2 million shares on May 17, valuing the company at $104.2 billion. The offering price gave Facebook a market capitalization almost double the $60 billion United Parcel Service Inc., previously the biggest company to complete an IPO, was valued at when it went public in 1999, according to data compiled by Bloomberg and Dealogic.
That means Facebook bankers will split about $176 million for managing the social-networking company’s initial public offering after accepting a lower-than-average fee of about 1.1 percent. The biggest share of IPO fees typically goes to the lead underwriter on the deal, though the cost of propping up the stock in the first day of trading could potentially outweigh any underwriting fees generated from the sale.
Key Bankers
Dan Simkowitz, Morgan Stanley’s chairman of global capital markets, was one of the main bankers on the offering, said a person familiar with the matter. He also helped run General Motors Co.’s 2010 IPO that raised $18.1 billion.
Michael Grimes, global co-head of technology investment banking at Morgan Stanley, also played a key role. He introduced Facebook executives to investors at a lunch meeting last week in Palo Alto, California, part of a road show to pitch the deal to prospective buyers. Grimes became acquainted with Facebook Chief Operating Officer Sheryl Sandberg when he handled the IPO for Google Inc., her former employer. He meets regularly with investors in search of the next promising startup and is an avid consumer of his clients’ products.
Sandberg recused herself from picking bankers for Facebook’s IPO because she had relationships with several banks from her previous job at Google, one person said.
Facebook Chief Financial Officer David Ebersman was the point person on the deal, starting with the selection of the lead bankers, one person said. Sandberg and Chief Executive Officer Mark Zuckerberg were involved in major decisions throughout the process, the person said.
The performance may hurt the entire IPO market in the short term, people said. Some technology companies considering initial offerings are readjusting timing and valuations based on the day’s events, one of the people said.
“I know a bubble when I see one,” Bill Gross, Pacific Investment Management Co.’s co-chief investment officer, wrote about Facebook in a posting on Twitter.
--With assistance from Ari Levy, Brian Womack and Douglas Macmillan in San Francisco, and Sarah Frier and Michael J. Moore in New York. Editors: Jennifer Sondag, Tom Giles
Sorry, But This Whining And Umbrage About Facebook's IPO Is Ridiculous
This isn't going to be a popular thing to say, but it needs to be said. So here goes...
All this whining and umbrage about Facebook's IPO is ridiculous.
When are people who voluntarily speculate on stocks finally going to take responsibility for their decisions?
Never, apparently.
On Thursday, Facebook priced its IPO at $38.
On Friday, the stock opened at $42, a 10% jump, and spent most of the day trading above $40. Then, thanks to heavy support from the company's bankers, the stock closed just above $38.
In other words, even after the sharp selling at end of the day, Facebook IPO buyers were better off than they had been the day before. And if they were among those who took the abundant opportunity throughout the day to sell stock above $40, they locked in a nice overnight gain.
But to hear people bitch, you'd think they'd been swindled out of their life savings.
The New York Post captured the prevailing sentiment perfectly:
ZUCKERS!
They were Mark Zuckerberg’s cash cows.
Hordes of everyday New Yorkers played the fool yesterday to Wall Street fat cats and Facebook insiders, who used a bloated stock price to milk them of billions of dollars during an overhyped IPO.
With a $38-a-share price tag and forecasts for a 10 percent jump, mom-and-pop investors blindly bought in with dreams of instant riches that never came true.
Meanwhile, the social network’s hoodie-wearing CEO finished the day with a net worth of $19.25 billion. The average Facebook employee saw their on-paper wealth shoot up to $2.9 million.
Wow, sounds horrible.
And what happened, exactly?
Apparently, IPO buyers got less free money than they expected to.
The hope, presumably, was that--no matter where Facebook's IPO priced--the enormous demand from suckers would cause the stock to "pop" when it started trading--thus allowing the shrewd IPO buyers to flip their shares at a profit only hours after buying them.
Of course, that's exactly what the IPO buyers were given a chance to do. For about 4 hours yesterday, the IPO buyers could have locked in an instant 5%-10% gain. But apparently this wasn't the 50%+ gain they were looking for.
Well, it's time for people to grow up.
The $38 that Facebook IPO buyers voluntarily paid for the stock--emphasis on voluntarily--was already an extremely rich price for a company with decelerating revenue and only ~$0.35 of earnings last year. The only way these buyers were going to get a big "pop" from that price was if other investors seeking the same instant riches were even more aggressive and reckless than they were.
And it turned out that those even-more-aggressive-and-reckless traders stayed home.
So Facebook IPO buyers only got their 10% instant gain.
And a lot of them, apparently, did not take the opportunity to lock in that gain. Instead, they held on to the stock, either hoping that it would trade higher (likely), or because they are actually long-term investors.
And now, with the stock looking as though it will crash through the underwriters' support and the IPO price on Monday, the IPO buyers are blaming their decision to hold onto it on Facebook, too.
So, what exactly were you looking for, folks?
Even more free money?
Just for pressing "buy"?
In what other normal universe would you ever expect that?
Facebook could not have been clearer about how it was going to emphasize the long-term at the expense of the short-term, and that's exactly what it did in choosing its IPO price. Facebook now has a lot more cash at its disposal than it would have if it had lowballed the IPO just to give buyers a "pop." That cash is valuable to the company, and it will help the company create more value over the long-term.
In the weeks leading up to the IPO, moreover, many analysts screamed from the rooftops that Facebook's stock seemed extremely expensive. We even went to far as to call it "muppet bait."
And when the stock opened on Friday at merely an extremely expensive price, instead of a ludicrous one, we were relieved. Because it meant that millions of investors weren't buying it at absurd prices in the after-market... and thereby setting themselves up to get creamed when the hype faded.
But apparently those who did buy the IPO were expecting to get something for nothing. (And not just "something." They were expecting to get a lot for nothing.)
And when they didn't, they started taking their frustrations out on Facebook.
Trading stocks is a risky business. Perhaps it's time for those who voluntarily choose to do it to acknowledge that.
And, Now, If Facebook's Bankers Can't Hold The IPO Price, Stock Will Crash To Low $30s ...
This morning, when the stock finally started trading, the fair-market price for the stock was about $40--just a couple of dollars north of where the deal priced.
This modest increase meant that Facebook didn't make the expensive mistake that most companies make, which is to let their bankers price the IPO too low and then see a huge IPO "pop." Although these "pops" are often viewed as a sign of a successful deal, they're anything but. They're merely a sign of that the IPO was underpriced: The company and its bankers give pots of free money to IPO buyers for doing nothing more than placing orders. (See: "Congratulations, LinkedIn, You Just Got Screwed!")
To illustrate this, imagine selling your house to a real-estate broker today for $1 million only to have the broker turn around and sell it to a buddy tomorrow for $2 million (a huge "pop"). If that happened to you, you'd feel like a moron. You'd also feel ripped off. And that's exactly what happens with IPO pops.
The ideal IPO is priced just below the market value, just as Facebook's was. This meant that Facebook and its selling shareholders got nearly full value for their shares.
It also meant, importantly, that individual investors who bought the stock after it started trading didn't get stuck buying it at a truly ludicrous price--say, $70. (At $40, Facebook's stock was merely very expensive, not absurd).
And it also means that Facebook won't have to try and fail to live up to a preposterous price.
So the deal was priced well.
But by the end of the day, the broader market, and Facebook's stock, were breaking down.
In the last 15 minutes of trading,
Facebook's stock threatened to break through the IPO price of $38. At that point, as they always do, the company's underwriters stepped in to buy shares, trying to keep the stock above the IPO price. And, as they did earlier in the day, they succeeded. The stock closed just above $38.
If the broader market continues to deteriorate, and there's no excellent Facebook news over the weekend, Facebook's stock will likely make another run at $38 on Monday. And, once again, the banks will likely buy humongous amounts of stock to try to keep the stock above the IPO price.
But, if the selling pressure becomes too intense, the banks will give up--and let the stock fall to wherever the new market price is.
And because the banks probably artificially propped the stock up at the end of the day today, there may well be a gap between the true current market price and the price at which the bank-supported stock closed.
So that means that anyone who still owns Facebook might be in for a rude awakening if and when the stock cracks the IPO price.
But doesn't that mean that the deal was overpriced?
No.
The market value for Facebook's stock for most of today was ~$40. It wasn't just the company's banks that were buying it at that level--nearly 600 million shares changed hands. That's more than the entire amount of stock sold in the IPO.
So anyone who doesn't think Facebook is worth $38--a conclusion that would beg the question why they bought it--could have gotten out today with a gain.
Companies and underwriters do not owe investors a positive return for buying IPOs. And trading stocks is a risky business. So no one should feel that, if Facebook's stock does "break" the IPO price, investors got screwed. (No one forced them to invest. And lots and lots of people warned that, even at the IPO price, Facebook was very expensive.)
In any event, Monday will be interesting.
As I've said frequently over the past few weeks, Facebook's current business does not support the IPO valuation. To justify that valuation, Facebook will have to roll out products and services that we haven't seen yet. So it will be interesting to see whether investors are as committed to the "long term" as they were when they also hoped that Facebook's IPO might deliver an IPO "pop" for the ages.
chongkonghui
Interesting.... FB just can't hold the over-priced price.
2012-05-22 14:43