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Facebook faces vital week after self-effacing debut
Facebook Inc might have a hard time in the coming week if Morgan Stanley, the lead underwriter stops supporting the stock and managers lower down in the IPO book who were hopeful for an early rush come to a decision to get out before going underwater.
Facebook sold 421 million shares of stock on Friday in an agreement that valued the company at more than $100 billion. But investors saw it close just 0.6 percent above the IPO price at $38.23 when they were expecting a first-day pop in price.
Morgan Stanley stepped in to hold up Facebook’s stock when it was cut down toward its $38 IPO price shortly after it opened.But indefinitely the bank will not support the stock. Funds that received IPO stock looking for a bounce may decide to bail as well, once that firepower is gone.
Lead underwriters sell shares to the market that they do not own. The underwriter supports it by then buying more stock at the IPO price if the stock has trouble, which Facebook did.
Morgan Stanley bought all of the shares traded around $38 in the last 20 minutes of the day. It would have used up nearly $2 billion.
A former chief operating officer for Bear Stearns, who dealt with IPOs on the investment bank’s syndicate allocation committee said, “Right now you have one big buyer, Morgan Stanley. That’s what people are trying to figure out, how much of the shoe is left. In most deals, on the Friday that would be it; come Monday, it would be all bets are off, by Tuesday for sure.”
A major broker on one of the lead underwriters said Friday that they would not be lending shares at least until resolution.
Mohannad Aama,the managing director at Beam Capital Management in New York said, “It is very likely to dip under $38, particularly if overall market conditions deteriorate. Morgan Stanley will continue to defend the $38 price, but that support is not endless.”
Eventually, Friday’s action suggests the IPO was actually priced to excellence. The company enlarged the sum of shares being presented last week and boosted the usual original selling price. Brokers at a number of broker-dealers were getting as much than they expected.
That is what frustrated those who are expectant on a 10 percent to 30 percent pop in the shares quite than considering the stock draw back to its IPO price shortly after opening.
“A Herculean effort by the underwriters, I would call it,” said Jeff Matthews of hedge fund firm Ram Partners. “How could it be a hot deal if all the usual mutual fund suspects already own some going into the IPO?” Mohannad Aama added.
Retail investors who were lured back into the market by the Facebook frenzy may relapse back to the concern that has slowed trading since the 2008 market break down if shares fail to recover in coming days.
Until May 29, those who desire to get bets against the company will not be able to do so all the way through the options market. Activities in options of companies suggest investors in using those to enclose against their position in Facebook, just like Zynga.
Dropped sharply on Friday, Facebook’s lackluster initial appearance also had a knock-on effect on some social media stocks. Groupon , Pandora Media, LinkedIn and Yelp all cut down at least 5 percent on Friday with Yelp losing 12 percent.