Some say the deal is over-subscribed, some say the public will not be able to get any stock, that even the institutions are having a hard time getting allocations, and some say investors are backing off because of concerns about the underlying growth of Facebook.
Now is a good time to say a few words about new issues being over or under-subscribed. My background as a new issue market maker and an underwriter gives me some insight into these issues in general and I will say a few words about the Facebook IPO in particular.
First, the underwriters will always put up a show of any issue being in great demand. They know that creating at least an appearance, if not the reality, of an IPO being a hot issue, is necessary to create demand. Who wants to buy something nobody else wants? There is always the risk that the issue will go to a discount to the offering price and you will lose money.
We know everyone wants something that is in great demand and with new issues, this is most obvious. If you can get an allocation of a new issue that is hot, it will easily go to a premium and your profit will be like not just like shooting fish in a barrel, it will be like shooting dead fish in a barrel with a shotgun.
Only the underwriters know for sure if the issue is all sold, or if there is excess demand. Having a strong demand for an issues makes their life a dream. They need make no effort to place the stock. The people that get the allocations owe them a favor, and in the jungle of Wall Street you need this kind of good will capital to survive.
On the other hand, having a dog on your hands is a nightmare. You have visions of your all important year end bonus dwindling. You now owe favors to anyone who takes the stock. In fact, if it declines in the aftermarket, they may hate you. They could even sue you.
So the underwriters would love to see a rumor line that the issue is in great demand.
A smart underwriter will not let the issue hit the market until he has sold enough, whipped up enough demand, that there will be plenty of investors left without stock who will buy in the aftermarket and make it a hot issue.
Hopefully this demand will not be from flippers who will toss the stock back on the market immediately, crushing the bid.
As to how much excess demand is needed, anyone can only guess. It will vary from issue to issue, market condition to market condition and stock to stock. This is art not science.
As underwriters are only as good as their last deal, they need not issues continually.
Fortunately, if they support the issue for about three months, their name will be forgotten if the stock then slides. It is enough for the stock to stay up for a decent amount of time. They need not be in there forever, but it will not hurt their ranking if the stock continues to go up. After two years, they can get a big payday from cashing in their underwriter's warrants if the stock is way up. A typical underwriter's warrant might allow the underwriter to buy 10% of what he sold at the issue price. You can therefore imagine which underwriters are happy with what issues.
With regard to Facebook, I suspect first that is will be a very hot issue. The media coverage is enormous and that always helps. Further, getting a few shares is a prestige matter as this is the deal of the year. With this allocation you get bragging rights and proof of clout, as well as profit. Finally, the public will be in there buying in the aftermarket, you may be sure.
However, the recent reports of the company would lead me to believe that the future for the aftermarket in the long term is clouded and I personally would not be recommending that you run and buy it in the aftermarket. Rather, if the stock goes to a very excessive premium, I would be looking at the short side, but I do not believe it will gap up that far, but I do believe it will trade at a good premium.
Strong Disclaimer -- This is not investment advice, rather I believe you should stay out of these markets. Shark tanks like this are only for the professional. I have no position and am very unlikely to take one. I am not predicting or advising, only explaining how the game might work. Best of luck to all.
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