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Corporate CFO turned Consultant/Professor. Financial Executive with comprehensive experience in: Initial Public Offerings; Private Funding; Sarbanes-Oxley Compliance; Key Performance Indicators; Strategic Planning; Business Plans & Analysis; Financial System Evaluation; Cash Management;... More
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  • Facebook IPO And Types Of IPOs And After-Market Support (FB) 0 comments
    May 21, 2012 10:11 AM | about stocks: FB, GOOG, VG

    There has been much discussion on the aftermarket support provided by Morgan Stanley and the Syndicate. This support is normal in a Firm Commitment IPO where the underwriters guarantee that they will sell all of the stock at the offering price.

    Basically, the underwriters purchased the entire issue at the negotiated discount and resells the shares at the offering price to the "book of investors" (from the road-show) and to the "friends and family" (members of the inner circle, special clients, etc).

    Normally, you could see the POP up, where shares would be scooped up and the Syndicate would participate in the up, selling shares at a higher price and create a "market" in the shares. If the demand was great, the underwriter would exercise their Greenshoe (over-allotment), selling more shares to be able to continue to create and maintain the "market".

    Now it is in the best interest of the underwriters to sell and support the stock until a floor has been established, which was very difficult on Friday. Multiple factors, which included trouble with the trading system where no one knew how many shares and at what dollar they owned, could have contributed to the level of interest. There was most likely a standing order (underwriters Syndicate) to buy all shares at or above the IPO price ($38.00 in Facebook's [FB] case). I would also bet that the $42.00 shares were purchased more by Syndicate than by retail action.

    In any case, this type of IPO was a Firm Commitment. The underwriters were strong enough to absorb the lack of retail market demand that was initially expected. In some cases, the Firm Commitment can cause the fall of an underwriter or the underwriter can just back away. There is NO TRUE GUARANTEE to the underwriter that his shares will have a market. They bought the shares from the company and the company has the funding. The rest is up to the underwriters.

    The second type of IPO is the Dutch Auction. You may recall the Dutch Auction of Google [GOOG] in 2004 was very successful, Vonage [VG] was not as successful. In a Dutch Auction, shares are sold directly to the public. WR Hambrecht and Company has an online service known as OpenIPO. From WR Hambrecht and Company's website http://www.wrhambrecht.com/ind/auctions/openipo/:

    "OpenIPO® is an innovative auction process for distributing stock to individuals and institutions through a more efficient and equitable process. The auction process allows shares of an initial public offering to be allocated in an impartial way. All successful bidders pay the same price per share."

    With a Dutch Auction, there is no such after-market support. It is all up to the market and as we saw with GOOGLE and Vonage, the market can "like" or "not like" [pun intended]. What would have happened if Facebook used OpenIPO, would retail have been more active, would the price have gone up, down or closed at $38.23?

    And finally, there is the Best-Efforts IPO. This type of IPO is usually a smaller IPO and lead by smaller underwriters. In this IPO a company needs the cash, has a product or service that has value in the Market and these underwriters can take the company through the IPO process, but there is NO GUARANTEE on the price and NO GUARANTEE on the amount raised. Yes "Best-Efforts"! The underwriter will try to sell the company's stock for the best possible price. Still one price and all the shares are sold, but the company could have expected $15.00/share on 2.0M shares for $30,000,000 (less underwriter fees and costs) and then the Best-Efforts can only get $9.00/share for total of $18,000,000 (less underwriter fees and costs). In addition, no or little, after market support!

    In summary, we have three types of IPOs: Firm Commitment, Dutch Auction and Best-Efforts. Different types of IPOs, different level of underwriter Syndicate support and expected after-market support.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: FB, GOOG, VG
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