Crucial week for Facebook

Analysts: Underwriter Morgan Stanley unlikely to support it indefinitely

NEW YORK: Newly issued shares in Facebook Inc may have a hard time in the coming week if lead underwriter Morgan Stanley stops supporting the stock and managers lower down in the initial public offering (IPO) book who were hoping for an early surge decide to get out before going underwater.

Facebook on Friday sold 421 million shares in a deal that valued the company at more than Us$100bil. But investors, expecting a first-day pop in price, instead saw it close just 0.6% above the IPO price of US$38.23.

As the underwriter, Morgan stanley stepped in to support Facebook’s stock when it fell toward the US$38 IPO price shortly after it opened, a source familiar with the matter told Reuters. The shares spent much of the last hour of Friday trading near that price, with onlookers watching to see if it would post a US$37.99 price – which it did not.

But the bank would not support the stock indefinitely, analysts said, and once that firepower is gone, funds that received IPO stock looking for a bounce may decide to bail out as well.

Lead underwriters essentially “short” a stock through what is known as an “overallotment” of shares – they sell shares to the market that they do not own. If the stock has trouble, which Facebook did, the underwriter supports it by then buying more stock at the IPO price.

Had Morgan Stanley bought all the shares traded around US$38 in the final 20 minutes of the day, it would have spent nearly Us$2bil. The “green shoe” overallotment, which can be used to support Facebook’s stock, is 63 million shares. At US$38 per share, that amounts to Us$2.4bil in firepower.

In an IPO where the stock rises significantly, the green shoe is typically exercised in the days after the debut and the company raises that additional amount. If Morgan Stanley shorted the full amount and bought shares on the open market to support the price, Facebook will not raise the extra Us$2.4bil from the IPO.

“Right now you have one big buyer, Morgan Stanley,” said a former chief operating officer for Bear Stearns, who dealt with IPOS on the investment bank’s syndicate allocation committee, but asked not to be named as he did not want to talk publicly about the issue.

“That’s what people are trying to figure out; how much of the shoe is left,” he said. “In most deals, on the Friday that would be it; come monday, it would be all bets are off, by Tuesday for sure.”

That opens the door for short-sellers and institutions looking to get out. Short-selling is expected to be limited for a few more days. A prime broker on one of the lead underwriters said on Friday that they would not be lending shares at least until settlement, which comes three business days after pricing.

In addition, with the stock market in correction mode as investors fret about Europe’s debt crisis and the outlook for global growth, the environment for a new stock is not ideal.

That could mean the stock’s fate will depend on the strength of the IPO anchor orders – the big clients at the top of the IPO book, whosee Facebook as a core holding – as well as a host of retail clients who are less likely to sell their shares quickly and may even be enticed to buy more.

“It is very likely to dip under US$38, particularly if overall market conditions deteriorate,” said Mohannad Aama, managing director at Beam Capital Management in New York. “Morgan Stanley will continue to defend the US$38 price, but that support is not endless.” — Reuters