The share price was raised mid roadshow.
More than once.
The underwriter realised that there was high demand.
And that meant they could get a higher price.
We are talking about the IPO process of Facebook (now Meta).
During an IPO, the underwriter (usually an investment bank), takes on the task of taking the company public.
They are responsible for finding the right value of the shares of the company, and therefore also the valuation of the company.
Before a company’s shares can be offered to the public in an IPO, they must be offered to institutional investors.
The idea is that large institutional investors would do their homework about a company. They would also be better at catching bad offers and fraudulent practice.
Based on the demand it received from such institutional investors (called anchor investors in India), the underwriter is able to decide a price range for the shares.
The system is designed to protect individual investors (retail investors).
Once the demand from institutional investors is received, the underwriter can offer a price range to retail investors during the subscription period.
This is what we hear about — “IPO subscription is open from x date to y date”.
During this period, investors bid for the shares within this set price range. When the bids received are for more shares than available, it is said to be oversubscribed.
We then hear, “XYZ IPO was oversubscribed by 20x”.
This means for every single share, 20 bids were received.
In such a case, the shares are allotted randomly (this is how it works in India). They are not allotted based on a first-come-first-serve basis.
Facebook’s Roadshow
The 2008-2009 period was horrible at Wall Street as we are all aware. The Great Recession.
Things were starting to look up. The mood was changing. A few tech companies’ IPOs were lined up.
The LinkedIn, Groupon, Pandora, and Zynga IPOs set the ball rolling.
Around then, the big daddy of tech companies announced its IPO plans. Facebook.
The company had 900 million users already and was still growing fast.
In 2011, they had a revenue of $3.7 billion. And an extremely enviable $1 billion in earnings. This number was 88% higher than the previous year.
By any measure, these are incredible numbers.
The company was hot.
Every major institutional investor wanted to attend the roadshow to know more. The first roadshow was held on 7th May, 2012, in New York.
Subsequent roadshows were held in various major cities across the country.
The underwriter positioned Mark Zuckerberg as a rockstar CEO.
And the institutional investors were impressed. So impressed, the underwriting team felt they could increase the share price.
Why IPO?
Before that, one may wonder, why does a company do an IPO?
Why does it want its shares to be traded on the stock exchange?
There are two main reasons for this.
Reason 1: Raising money from investors for future expansion.
Reason 2: Exit opportunity for existing shareholders.
Reason 1
In a fresh issue, brand new shares are created by the company and offered to investors. The money from these sales go directly to the company.
This is why in the IPO, companies tend to state what their intention with this money is.
Investors judge the future potential of the company based on this among others.
Reason 2
Doing an IPO lets existing shareholders sell their shares (and new investors to buy) easily.
In this case, all shares sold are existing shares.
It could be an early investor in the company (venture capitalists, angel investors, etc), it could be the employees with stocks, and even the founders themselves.
The money from selling these shares goes to whoever is selling. It does not reach the company.
Such shares are called Offer-For-Sale (OFS) shares.
Many IPOs are a mix of both: there are some fresh issue shares and some OFS shares.
In their papers, IPO-bound companies reveal this clearly: number of shares on offer, and the number of fresh issue, and OFS shares.
Yes, there are cases where companies do a 100% fresh issue IPO and also a 100% OFS IPO.
Neither of the two is automatically better. It all depends on why and how. It is extremely subjective.
Facebook’s IPO had about 43% fresh issue shares and about 57% OFS shares.
Underwriter?
Now, wait, who is the underwriter?
In Facebook’s case, Morgan Stanley was the lead underwriter while several others were also a part of the process.
The underwriter is hired by the company going public. In case of very large IPOs, multiple underwriters may be appointed.
What is an underwriter’s task anyway?
Well, it is appointed by the shareholders for their benefit.
Their first task is to ensure due diligence. They check all the company numbers and make sure everything is correct and accurate.
They prepare the paperwork and ensure the company is fully compliant with all listing requirements.
Then, they try to establish the right share price.
At first, they prepare the estimates based on all existing numbers and future prospects.
Then they file with the regulators to seek clearance to go ahead with the IPO. If all checks out, they are ready to start asking for bids.
At this stage, the Draft Red Herring Prospectus (DRHP) is made publicly available.
DRHP is what it’s called in India. In the USA, it’s called the S-1 Filing.
This document contains all details that investors must know to decide whether they want to invest or not.
After the release of the documents, the underwriter conducts roadshows.
Roadshows are basically conferences where prominent institutional investors are invited to express interest in the shares of the company via bidding.
In Facebook’s case, the initial price range quoted was $28 to $35 per share.
This translated to a valuation of $77 billion to $96 billion.
Mid-way through the roadshows, this was raised to $34 to $38 per share. This meant Facebook was being valued up to $104 billion.
Then, they kept the price range the same, but increased the total shares on offer by 25%.
At the end of the roadshow, the final price was $38. A valuation of $104 billion.
Leaving Money on the Table
Predicting the “right” price is an extremely tough task. It can be considered impossible to do perfectly.
If the underwriter keeps the share price too low, the share gets sold at a price too low to IPO investors. The money the company gets in such a case is too low.
Then, when the share lists, the share price shoots up. Investors and flippers who bought the stock during the IPO process make big money.
This is often described as “leaving money on the table”.
The company misses out on the potential money it could have made from the IPO.
The challenging bit is estimating how positively or negatively a company will be received by the larger investment community.
Every single bumper IPO listing or crash is viewed as a miss by underwriters. It means their estimates were wrong.
On the flip side, if they price the share too high, fewer investors will buy into the IPO. They’d expect the share price to fall after listing and thus would not be interested.
If an underwriter does their job extremely well, the share price would be flat after listing.
A situation like that would mean the company left less “money on the table”.
In reality, this almost never works.
Listing prices are seldom flat. They are either up or down.
Or, they are very up or very down.
After Listing
On the day of Facebook’s listing, 18th May 2012, chaos ensued.
The exchange algorithm got overwhelmed by the massive number of orders being placed. It glitched.
The stock finally listed 30 min after it was supposed to.
The price shot up to as high as $45.
However, it was clear that the glitches were not solved. The price was not reliable. Nobody trusted the price shown. Total chaos.
Towards the end of the trading day, the price started plummeting down. From $45, it fell to around $38.
If a share price falls below the issue price, it is deemed a failure. It wouldn’t have looked good for Facebook. It wouldn’t have looked good for its underwriters either.
It is common for underwriters to try to “support” the price.
How did they support the price?
Green shoe option.
Green Shoe Option
A green shoe option is an agreement underwriters sign with other investors.
The green shoe option lets underwriters sell up to 15% more shares. These shares don’t exist by the way. This is a naked position.
What happens is that the underwriter is supposed to buy these shares from the open markets and supply the shares to the buyers.
By using the green shoe option, the underwriter had been able to gather $2.4 billion.
This is how they supported the shares.
They started buying as the share price fell towards the end of the day.
This kept the price above $38.
The day closed with Facebook’s share trading at $38.23 — an extremely small listing gain.
Over the next few days, when the underwriter was no longer supporting the price, the share price fell well below the $38 mark.
The underwriters had placed shorts at $38 and as the share price fell, they were able to make $100 million in profits.
The green shoe + naked shorting was what did the trick for them.
The green shoe option is a fully legal method that is used to ensure price stability. Underwriters do not always use this option.
In India, this kind of a naked green shoe option is not allowed. They must borrow shares, not sell shares that don’t exist.
Also, in India, underwriters cannot profit from green shoe options. The green shoe option must only be used to stabilise the share price.
Share Price After IPO
It wasn’t just the IPO. The company was also facing challenges.
Facebook’s revenues were almost entirely reliant on ads from its website.
2012 was a period when a rapid shift from computers to smartphones was taking place.
There were fears about how Facebook’s future revenues would fare.
By September 2012, the stock had fallen by over 50%. This also coincided with the ending of the lock-in period of many early investors.
(Early investors like venture capitalists, angel investors, founders, etc. are locked in for some period. They cannot sell their shares on the listing day. In the case of Facebook, it was between 90 and 180 days).
Which means, many of them were selling their shares.
Around this time, Facebook initiated a massive shift to being mobile-first. Acquiring Instagram and WhatsApp was a part of this strategic shift.
Early indicators of this were starting to become visible. In October 2012, it was revealed that 14% of Facebook’s revenue was coming from smartphones (website and apps).
This was the turning point.
About a year later, the turn around was complete as the stock finally crossed the $38 mark.
After that of course Facebook grew at a pace so good that it became one of the best performing stocks of the last decade.
Measured between the listing date (May 18 2012) and this month (Sept 2026), the stock has returned around 23% per annum.
Today, it stands at about $750 per share.
IPOs
Facebook’s IPO is an excellent lesson in IPOs.
It shows us how underwriters try to “discover” the price of a stock before the listing takes place.
It also shows us how wrong they can be — not only because it’s hard to estimate, but also because the factors affecting companies keep changing.
The companies themselves keep changing.
To keep matters simple, some details have been skipped. The reality is that this particular IPO had some controversies too. And that’s a lesson as well — there are vested interests and some bad behaviour can happen.
This is why investors’ analysis into each IPO matters.
The gist of all of this is: a company decides to make its shares available on the share markets.
The share price range is estimated and offered to institutional investors. Based on that, a more realistic price is reached.
The newly arrived price range is then offered to retail investors.
Investors bid for this and get shares allotted.
When the share lists, the share price shoots up if investors think the shares are still underpriced. Or shoots down, if it is grossly overpriced.
Or, they move slightly up or down if priced more or less correctly.
Eventually, in the long run, the company’s fundamental business catches up.
Its operations, revenues, earnings, and future potential determine its share price.
The IPO becomes a distant memory.
Quick Takes
+India’s Core Industrial Output rose 4.8% in August, as per provisional data compared to 5.4% in July. Out of the 9 sectors, coal, natural gas, crude oil, and fertilizers fell.
+The India-New Zealand Free Trade Agreement (FTA) will come into effect from 20 Oct. It provides duty free access for 100% of Indian exports to New Zealand.
+The government signed a contract worth Rs 586 crore with Accurate Industrial Controls to purchase auxiliary power units for T-72 and T-90 tanks.
+SEBI settled adjudication proceedings against 5 Adani group companies after settling with an amount of Rs 1.50 crore over corporate governance issues highlighted in the Hindenburg report.
+NPCI clarified that merchants do not bear the cost of GST on MDR as it will be adjusted against GST payable on sale of goods, clarifying concerns on additional burden on merchants.
+The government signed a contract with Bharat Dynamics worth Rs 810.79 crore for 160 Satellite Smart Anti Airfield Weapons and associated equipment.
+All PSU Banks and regional rural banks will be open on Sunday, 27 Sep ahead of the nationwide bank strike from 28 Sep to 30 Sep.
+The government connected a remote area in South Chhattisgarh through a new rail line that will facilitate iron ore transportation to Bhilai Steel Plant.
+SEBI approved multiple decisions in its board meeting, including portfolio management regulations, Unified Common Advertisement Code (CAC), Depository Receipts (DRs) for REITs and InvITs, among others.
+The government reduced customs duty on imported crude edible oils due to high international prices. Crude Sunflower Oil: 10% to nil, Crude Soybean Oil and Crude Palm Oil: 10% to 5%.
+Finished steel production rose 4.1% year-on-year to 68.3 million tonnes between April and August.
+The government extended anti-dumping duty on decor paper imports from China till Mar 2027. The duty imposed in Dec 2021 was $110-$542 per tonne for 5 years.
+NSE listed at Rs 1,800 on BSE, a premium of 0.84% over its issue price and closed 1.85% higher.
+India’s forex reserves fell $14.88 billion to $765.90 billion for the week ended 18 Sep.
+India recorded the highest ever FDI inflow of $94.53 billion in FY25-26: Commerce Minister Piyush Goyal. The cumulative inflows between FY14-15 and FY25-26 stood at $843 billion.
The information contained in this Groww Digest is purely for knowledge. This Groww Digest does not contain any recommendations or advice.
Team Groww Digest