Facebook Inc. Shares skidded on their second day on the stock market to well below their offer price, leaving some investors who bought in the social network's public offering in the red and raising questions about whether the company and its lead banker, Morgan Stanley, botched the deal.
The shares, which managed to stay a hair above $38 on their Friday debut with the help of Morgan Stanley, on Monday lost their footing, dropping to as low as $33 before closing down 11 percent at $34.03.
It wasn't clear what role if any Morgan Stanley was playing in the stock's trading on Monday. The sharp drop in the share price brought out critics, who faulted the banks who advised Facebook on the deal, saying it was priced too richly. Facebook added to the number of shares for sale and raised the price just ahead of the deal.
"The underwriters completely screwed this up," said Michael Pachter, analyst at Wedbush Securities. The offering "should have been half as big as it was, and it would have closed at $45," he said.
A person familiar with the matter said Morgan Stanley, the lead bank on the deal, did what it was "paid to do," adding the bank "stood by the client and supported the issue."
Spokesmen from Morgan Stanley and Facebook declined to comment.
Historically, the ideal first-day gain for an IPO is 10 percent to 15 percent, an amount seen as a way of compensating investors for the risk of buying into a new stock. Stocks that barely eke out a few percentage points or end the day flat with their offering price aren't considered successful debuts by buyers, and anything below the price can mean an instant loss.
Although the lead investment bank is under no legal obligation to prevent a company from declining below its IPO price, it will step in and start buying shares on most major offerings to keep the stock price at least flat with the IPO price at the close of trading. That support can continue beyond the first day, depending on the deal and the bank.
The Facebook offering raised about $16 billion, making it one of the largest US ipos ever.
A number of factors combined to undercut the potential success of the share performance, market participants said. Problems Friday morning at the Nasdaq Stock Market left some investors with orders processed improperly, if at all. Traders said the problems weighed on the share price, as some investors didn't know where they stood with the stock.
SOURCE LINK: WALL STREET JOURNAL