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.
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.)
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?
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?
> 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."
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.
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.
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.
 http://www.inc.com/eric-markowitz/facebook-going-public-inve..., Ctrl+F for "90 days"
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:
To prevent the price of something from falling, you can:
(1) Increase its demand.
(2) Decrease its supply.
Which one does the "greenshoe" do?
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.
Bid (size): 38.00 (x9999900) Ask (size): 38.01 (x146300)
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.
Also, Zuck owns 57% of the voting shares, so it's not like he really gives a damn what the traders think.
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!
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.
"Facebook fails to live up to the hype"
"Facebook Fails Day-One Pop, Lags Behind Google"
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.
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.
As are employees locked in for 3 months while seeing their stocks free falling.
I'd be willing to bet there're some very happy algorithmic traders out there right now.
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."