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Morgan Stanley bought 63M Facebook shares ($2.3B) to create a floor around $38 (reuters.com)
195 points by liuwei6 on May 19, 2012 | hide | past | web | favorite | 60 comments

The Wikipedia page on the "greenshoe" gives more detail on how Morgan was able to safely buy these shares: http://en.wikipedia.org/wiki/Greenshoe

Brief summary: Morgan oversells the offering. Facebook gives Morgan the right (but not the obligation) to cover its short position by buying shares at the offering price. This is a defensive maneuver.

If the stock pops, Morgan buys the shares from Facebook at the offering price in order to cover its short. Otherwise they'd have to purchase at the market price (which would cause them to lose money). This is the hoped for scenario.

In the unexpected case, where the stock's price trends below the offering price, Morgan covers its short by buying shares directly from the market (instead of from Facebook). This stabilizes the price of the stock at the offering price and ensures that public investors don't go underwater soon after the offering.

It sounds like there are some complicated maneuvers that the underwriter can pull to make some money off the greenshoe (it's not all flowers and sunshine: http://dealbreaker.com/2012/05/facebook-ipo-goes-nowhere-in-...) but this particular implementation seems relatively good to Facebook and the public investors.

A lot of misunderstanding about the greenshoe...

It's really simple: The IPO sells X+Y shares, where X is the big IPO number of shares and Y is the "over-allotment".

If the stock trades above the IPO price, the money from selling Y shares is given to the IPO company along with the rest of the money from selling X shares.

If the stock drops below the IPO price, the underwriters start buying back (up to Y shares * IPOprice) using the money from the initial over-allotment.

It is one of the few times outright price manipulation is allowed (which should be a completely different discussion, and likely why MS declined comment.)

"It is one of the few times outright price manipulation is allowed (which should be a completely different discussion"

I'm curious to know what arguments are in favour of it. If they're incorrectly pricing the IPO, surely they should suffer for it and adjust their pricing models and strategies rather than be allowed to manipulate their way around what's pretty much their own mistake?

I don't know much about how companies go public but it sounds like a good portion of the stock is issued to "investors" at or below the IPO price who then immediately go on to sell that stock to the public when trading is opened? So the downside of pricing the IPO too low is the company won't receive as much for the shares as they could have. Presumably just issuing the shares directly to the public during the IPO seems like the way to capture the best price? Is the problem that the exchange doesn't allow for the issuing of shares, only the trading of shares, so somebody needs to own them first? I'm sure there's a good reason why but what is it?

Simply put, the argument is that the the 'price' of price manipulation is one the market (read: the purveyors of the exchange who get to make the rules) are willing to allow in exchange for an orderly, stable market. IPOs are hectic times, and they want some stability while the dust settles.

So if I understand what you're saying, does this mean there are less total shares released into the market than there would have been if the price went up instead of dropping?

In the case where the price goes up, the shares to cover the short are sold by Facebook to MS right? In the case that happened yesterday the shares came from the marketplace which means those shares are now no longer in the market right? Where in the case of the stock going up, those shares would have stayed in the market.

Basically what I'm getting at is this could be viewed as a good thing right? It means that the total outstanding shares is now less than it could have been had the stock gone up. Right?

First: Stop thinking of it as a short. The underwriters are not short because of the overallotment; They've sold those shares along with all the "normal" IPO shares to mutual funds, pension funds etc. They are never obligated to "cover the short", the shares are permanently issued.

> does this mean there are less total shares released into the market than there would have been if the price went up instead of dropping?

Yes. When the share price hit 38, it is likely that MS took the money earned from selling those over allotment shares and bought a bunch of shares back.

> Basically what I'm getting at is this could be viewed as a good thing right? It means that the total outstanding shares is now less than it could have been had the stock gone up. Right?

That is an optimists view. The pessimist might say "This is a bad thing: The demand was low enough that the full greenshoe was not sold along with the IPO."

I love it. Stock pops after IPO, greedy bankers taking the company money. Stock doesn't pop, overhyped failure. I wonder what a successful IPO would look like. Price doesn't change, no trading volume?

No doubt. This is a huge win for Facebook, as the article sort of mentions. There's no money left on the table, Facebook got full value for their stock.

Short term yes. But it's a little like a concert that is able to extract the maximum amount of seat sales revenue but has a bunch of non-filled seats which don't look to good for people attending and writing about the concert. Or a half empty restaurant on Saturday night. The story is that the price had to be supported. I'm not sure that is the message that will be good long-er term with a thing that is sold on psychology as opposed to fundamentals.

After all there is no way people getting in on the IPO bought the stock at $38 thinking it wasn't going to go up the same day.

To me it all seems like part of the same problem: some banker pulls a number out of his ass as "the price". There should be an auction or market of some other kind to determine the price, because... well, markets are a pretty good mechanism for determining prices, usually much better than any one individual or small group.

There's a bit of a feedback mechanism, since the only price that really matters is the one you can get. If you had an auction (the stock market is already an auction that's always ongoing, btw) as soon as its revealed that Warren Buffet bid X, you'll see people bid X+1, even if 30 seconds earlier they had scoffed that X was totally unrealistic. You could have a silent auction, but the facts come out eventually, and then you'll see the same eruption of trading. That's almost what the bankers are doing behind the scenes, holding a private silent auction.

that is what happens during the roadshow, which led to the price going up in the last few days and more shares being issues because of demand

funny that Google tried the auction, ended up getting wall st against them and colluding to lower the price. Facebook co-opts all the big name banks as underwriters and gets a near-perfect opening price.

"gets a near-perfect opening price."

If Morgan-Stanley was propping the stock up, then that's strong evidence it wasn't a near-perfect opening price, but that it was too high.

Which makes it near-perfect for Facebook (more capital from the sale), but less-so for shareholders, particularly those looking to make a buck on a quick flip.

Anyone know if FB employees with shares can sell them immediately after the IPO or do they have to wait after a certain period?

There is generally a lock-out period to make sure people are buying the company's shares, not all the employees' shares.

Can employees still sell their shares on secondmarket now that FB is public?

They might be able to, but there is no real reason to buy on a second market now, so the market would be illiquid. If the employee would want to sell now for fear of a devaluation during the lock out period they could buy put options at the current valuation, haven't checked the price, but those options can't be too expensive right now.

Employees are almost certainly restricted to trading windows independent of any lockout provision. Given the lockout, it's unlikely that there is currently an open trading window. Any insider trading options outside of that window is likely to run afoul of the SEC.

There is a 6 month lockup period.

3 months in this case[1]

[1] http://www.inc.com/eric-markowitz/facebook-going-public-inve..., Ctrl+F for "90 days"

Gotta dump those shares before the tax code changes next year.

Then Facebook employees better hope the stock price doesn't fall to half of what it is now in 3 months.

I guess we'll be seeing a lot of 2 week notices in 6 months..

Is this another way of saying that Facebook isnt really worth $38?

They are to the underwriters that defended them at $38. : )

From the article: "The firm did this by tapping into a 63 million share over-allotment option, or greenshoe, according to sources familiar with the deal."

The title of your post is inaccurate. No one knows for sure how many shares MS bought during the initial day of trading.

For a full breakdown of the first day of trading, check out Zerohedge's analysis:


Very interesting. I'd love to know how to interpret this: http://www.zerohedge.com/sites/default/files/images/user5/im...

To be honest. I am not that worried if some investment bank got a problem, because Facebook manages to get so much money from the IPO. At least this time, the company which creates true value wins. Unfortunately, in most cases company in first day of trading price rise significantly so it potentially raised less then it was possible.

I'm confused by this "greenshoe" business.

To prevent the price of something from falling, you can:

(1) Increase its demand.

(2) Decrease its supply.

Which one does the "greenshoe" do?

The greenshoe increases the demand. MS placed a 38.00 bid with an enormous size, so if you were to look at the live feed, you would have seen something like: Bid: 38.00 x 9999999 Ask: 38.01 x 1234

I feel like its worth adding, for those who don't trade. If the stocks goes down, you are looking for short/long terms supports it may [temporarily] stop on. Those are usually backed up by either history of the stock (recent supports) or psychological barriers (like a round number). In situation of a stock with couple hours of history those will be psychological like number 38. Then a trader looks how much support there is on certain level. In this example there were about $300MM (IIRC) worth of stock somebody asked to buy. So if you ready to sell because there is a panic and stock does not want to go up, you see so much cheddar [of support at $38] that someone is willing to buy that you tell yourself: "there is no chance someone will sell so much stock, so it won't go lower". So you don't sell at this point of time. Less people want to sell, more demand for the stock. Stock then stops or goes up, BUT at least the fall was indefinitely defended.

But again, depends what decisions big fish will do over this weekend, Monday morning you may see shit on $38, or if they offer plenty for sell at any price, you may see a gap down like start trading at $36.

Hope this helps.

via gojomo http://news.ycombinator.com/item?id=3993727


  Bid (size): 38.00 (x9999900)     Ask (size): 38.01 (x146300)

Decreases supply. They bought up shares on the market, as opposed to buying them from FB itself.

Did the investors get the valuation correct? Is it really a $100 B company ?. I am reading through the prospectus now. http://www.sec.gov/Archives/edgar/data/1326801/0001193125120...

I suspect they will keep this up next week. They will also work out a deal with facebook for facebook to buyback lots of the shares that Morgan Stanley is buying. That way the stock price can go up while the market cap is going down.

We know it was MS that's supporting them at that psychologically important $38 figure, but that $2.3B figure is just speculation. Still, I'm sure there are some very nervous traders this weekend over at MS. Would not be surprised to see a lot of shorts on stocks like Yelp, Zynga as a hedge.

What a disaster this IPO was (for the banks, not for facebook). Though, I'm sure the people at Facebook aren't exactly happy with the way things went and all the (unfair?) negative press / scrutiny that they will receive now.

I honestly can't see them caring a whole lot. Scrutiny and bad press can only impact your stock prices in the short term; in the long run they'll revert to the mean. If Zuck and co. feel like facebook is a fundamentally strong bet, then they'll be inclined to ignore fluctuations in the price and look to the long term a la Amazon.

Also, Zuck owns 57% of the voting shares, so it's not like he really gives a damn what the traders think.

Ok and this is what I don't get. Usually companies that are traded publicly have responsibilities toward stockholders to do anything in the power (reasonably) for the stock to be going up. That the simplicity of a stock market - no investor is willing to lock its money knowing a company is not willing to grow.

Now, if you have one guy (that to average person is called a "hacker in the hoodie"), how do you trust a stock? What if there is some terrible decision he is about to make and the board can do shit to stop him because he has the majority of vote.

Basically, fatum of all stockholders money in this stock lays within one single guy and his 57% of vote. Can you imagine, hypothetically what would happen if tomorrow Mr. Zuckerberg is hit by the bus? ? Yes, I am sure they have backup plan for the backup plan in situations like that, but cant you imagine what kind of signal would that send to media? The stock would dive like a scubadiver on a deep-dive mission!

The bus factor is priced in, as is the assumption that Facebook will dramatically increase its revenue in the long run. If Facebook would not grow anymore, the stock would instantly collapse.

netrus, I don't think it works like that. You just described a crystal ball. You sure they know everything that is in this stock? Would there be a justify reason behind something called "Stock exchange" if everyone would know everything in the future?

And what do you mean by instantly? Like the first day or first year, or what? because as far as I remember everywhere I talked with bankers, everyone from teen that just turned 18 to a 95 years old grandpa withdrawing last savings were going to buy Facebook stock. But this is not what Friday has showed to us. 2 things; either: a) entire world change its mind overnight (I spoke with banker as late as last Thursday), or b) there was so much selling happening, that if the world was buying, it wasn't just enough to build demand and push the stock up. I go with gate #2, considering how much underwriters were willing to buildup on $38. A $300,000,000 worth dam!! I guarantee you, plenty of big fish is shitting in pants right now. To many of them this weekend, before Monday opening, is not a chilling out and relaxing time. I think by next Friday you will see some spectacular action on this stock.

Further, I think that Zynga, Groupon, Zillow, Linkedin, ZipCar, Pandora and others -- they are all assuming dramatically increase in revenue. But yet they are all below (some significant like Groupon or Zynga) their IPO price.

Well, I'm not sure this is true. You typically want to have a strong IPO to generate momentum for your company and shape the public's perception. Perhaps this is different because so much was trading in private markets before the IPO, but it does seem like perhaps they should have priced around the $36 range. Now the story over the weekend is

"Facebook fails to live up to the hype" http://www.thenewstribune.com/2012/05/19/2150253/facebook-fa...

"Facebook Fails Day-One Pop, Lags Behind Google" http://www.businessweek.com/news/2012-05-18/facebook-failing...

Had they priced it a bit lower and left some money on the table, you likely would have had enough positive momentum to probably maintain a 10-15% pop.

Does this matter for the company? Probably not. From my very limited experiences, the quality of people at facebook seems generally very high, and the culture seems focused on building product, not managing investor perception. Big picture, it's just a blip, but on the margin, it wasn't the ideal outcome.

$2/share is a lot of money to leave on the table for a nice weekend of press.

Don't think it's just weekend press, and I don't think the investor community thinks of it that way either. It's sending a statement that they don't necessarily care about rewarding their investors. We won't really know what happens until MS isn't around to support the price.

I'm excited to see what happens when you have a company that explicitly lets investors know that they're out to build products, not manage investor relations.

Isn't that what Jobs and Bezos have done?

In Jobs' case, he had a lot of charisma on his side. The investors could watch the song-and-dance that he put on at the keynotes and get excited about Apple's products (or not).

Although this situation with the underwriters propping up the price makes Facebook's value pretty questionable and will create a negative sentiment, I believe it's positive for Facebook that the price didn't pop. Facebook already has a pretty steep road to travel to live up to the offering valuation. As a CEO I think I would prefer having a muted, non-volatile stock price than an inflated, volatile one. Inflated prices are good when you're ready to sell but can be a distraction when you're growing. Underwater options and market reactions can destroy employee morale --- look at Yahoo.

"Underwater options and market reactions can destroy employee morale --- look at Yahoo."

As are employees locked in for 3 months while seeing their stocks free falling.

Haha, just wait until/if it drops below $38... the banks could get hosed on this.

Market Place has more info about Morgan Stanley, the underwriter, supporting the Facebook stock: http://www.marketplace.org/topics/business/weekly-wrap-what-...

A well written article; interesting enough in spite of not having any quotable sources. A more accurate title might have been "Reuters shut-out; Facebook IPO bankers remain mum"

I wonder who the counterparties were.

I'd be willing to bet there're some very happy algorithmic traders out there right now.

I guess the "trading glitches" were not in place for Morgan Stanley's buy orders.

As I said a month ago.

May 17 is a terrible time to IPO. Facebook will be fighting against a falling stock market. Operation twist is about to end, and there are a lot of believers in "Sell in May and go away."

I've heard there are also a lot of believers in "Buy in May, Hip Hip Hooray!". I think both of our believer sayings have about the same amount of credibility...

Sell in may is one of the few statistically proven effects that continues to this day.

Insiders were selling their Facebook shares pre-IPO.

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