PRIVCO: Facebook "breaks deal price" as investors sell; IPO underwriters unable to further support IPO price with "stabilizing bids" of $38/share; Stock down 22.4% from last secondary market trades of $44.10/share in March
Facebook has officially broken its $38 deal price in its second day of trades on the NASDAQ exchange. Photo Credit: PrivCo
New York, NY, May 21, 2012 1:58pm EST – Newly public Facebook (NASDAQ: FB) (PrivCo Ticker: FACEP) has plunged below its $38 IPO price this morning after testing that boundary all-day on Friday during its public debut.
On Friday, Facebook was saved from closing below $38 by its IPO underwriters who bought heavily at a $38 "stabilizing bid". The bid prevented an embarrassing close below the $38 deal price, however, today the underwriters were unable to risk any more of their firm's funds. Without underwriter purchases, Facebook's artificial support level disappeared and its stock began a freefall in heavy volume. (Over 130 million shares traded hands by 1:30pm EST.)
By breaking through its $38 IPO price floor, Facebook joins Zynga, Groupon, and other disappointing debuts on an infamous list of ‘Broken IPOs’. A ‘Broken IPO’ is any public company whose share price sinks below the IPO price.
Currently trading around $34.20, Facebook’s value has dropped $10.4 billion from the $104 billion valuation given at its $38 IPO price. Additionally, Facebook’s IPO investors who bought shares at $38 have lost a total of $1.6 billion.
PrivCo breaks down a few key reasons for Facebook’s ‘Broken IPO’ and its future implications.
1. Facebook’s Overvaluation
When Facebook re-priced its IPO range from $28-$35 to $34-$38, selling shareholders increased their offering by 53% which boosted Facebook’s total offering by 25% to 421.2 million shares.
By increasing the offering, Facebook oversupplied the market with Facebook stock. Pent-up retail investor demand was more than met by the massive float, and could no longer act as a catalyst to pop Facebook’s stock above its IPO price.
3. Removal of Underwriter Support
As Facebook’s price sunk on Friday, underwriters including Morgan Stanley stepped in with stabilizing bids to prevent Facebook from dipping below its $38 IPO price. The stabilizing bid is a risky contractual obligation for underwriters to purchase enough sinking stock to create a price floor. Without Morgan Stanley’s stabilizing bid, Facebook would have certainly dipped below $38 on Friday.
Morgan Stanley has most likely ceased purchasing Facebook stock at $38/share today which has accelerated its decline to $34.20.
4. $2.4 Billion Green-Shoe and $26.4 Million in Wall Street Fees in Jeopardy
Facebook's over-allotment green-shoe option which would raise $2.4 billion and add 63 million shares from selling shareholders is also in jeopardy. Green-shoe shares would enter the market at the IPO price of $38/share typically a week or two after the IPO. However, with Facebook currently trading at $34.20, there is simply no market for Facebook stock at its IPO price.
Aside from selling shareholders, Facebook's underwriters who earn 1.1% of the offering stand to miss $26.4 million in fees attached to the green-shoe's activation.
Failing to exercise the green-shoe could prove disastrous to selling shareholders who may have already spent their anticipated earnings as exercising the over-allotment green-shoe option was all but guaranteed last week.
Shareholders such as Accel Partners and DST Global could miss out on $263 million and $260 million respectively, but they did well in the IPO. Insiders who did not participate in the IPO stand to miss the most cash without a green-shoe. They include:
- Sean Parker - $380 million
- Valiant Capital - $304 million
- Dustin Moskowitz - $285 million
Below PrivCo breaks down all the selling shareholders whose green-shoe cash out is becoming more and more unlikely:
5. Facebook Halo Effect:
"Many private companies and VC backers had been saying 'wait until after May 18', when the expected Facebook IPO pop and super-valuation were set to open the IPO window wide open. Clearly, that's now not going to happen," said PrivCo CEO & Founder Sam Hamadeh in a statement.
Hamadeh adds, "The Facebook IPO halo effect for other private companies hoping to IPO will not only fail to materialize like private market investors had hoped, but may now have the opposite effect, as IPO investors again lick their wounds after getting burned again on a major Internet IPO. Facebook is salt to their wounds suffered from buying into the IPOs of Zynga, Groupon and Pandora, among others."
