Dispatch from the Aftermath of the Facebook IPO

An investor and his professor after class

In the days before the Facebook hysteria had fully bloomed, we sought comment from investors who planned to buy the stock. Did they know half of Twitter was bashing Facebook as massively overpriced? Were they chasing the next Google? Did they just like Zuck?

Yesterday we finally caught up with a Facebook investor. Alper Aydinoglu is a 23-year-old finance major at DePaul University; He woke up Friday morning to learn he had received an allocation of 50 shares from E*Trade, out of the 250 shares he’d requested.

“I did think the stock was overpriced,” Mr. Aydinoglu told The Observer. “But I still went ahead and participated because there was so much hype, and I was looking for a first day pop.” Besides, he added: “When you invest in a company like Facebook, you don’t invest with 100 percent fundamentals, you look at growth potential.”

In the end, the offering fizzled. Trading was delayed 30 minutes when frenzied demand tripped a glitch in Nasdaq’s software. The stock popped, then receded, leading underwriters to stand on the buy button at $38. “It’s very typical for underwriters to step in and stabilize the price right around the offering number,” Charles Jones, professor of finance and economics at Columbia Business School, told The Observer. “It’s fairly par for the course in a cold IPO.”

The support softened yesterday and shares sank, closing down 11 percent; Mr. Aydinoglu sold his shares at a loss of about $220.

That shares closed Friday just above the offering price meant the deal was priced correctly, said some; the high-ish price might have even scared off short-term players, thus protecting muppets far and wide. Others argued that every major player—from Nasdaq to the high-frequency traders who overwhelmed it, Facebook, Morgan Stanley and indeed all of Wall Street—came out with reputation worse for wear.

Then there was this bit of intrigue: Felix Salmon suggested that the “greenshoe” over-allotment provision typical to IPOs left underwriters short 63 million shares, a bit of magic that might have netted as much $2.4 billion when the share price fell today, had the investment bankers not spent Friday gobbling stock at $38 in a battle to keep shares above the offering price.

In the lead-up to Facebook’s offering, we discussed auction-style IPOs with Ann Sherman, Mr. Aydinoglu’s finance professor at DePaul University, who had once hoped that Facebook would adopt a “hybrid offering with retail tranche,” a type of IPO that’s favored in most of the world. (Other than the U.S., holdouts include Barbados, Paraguay, Bangladesh and Pakistan.) In that model, underwriters use the traditional book-building method, but rather than allocate retail shares to be doled out by brokerage houses, retail shares are allocated by lottery (at least in oversubscribed offerings).

Would a hybrid offering have saved retail investors from losing shirts in Facebook’s IPO by keeping flippers out of the game? Too many assumptions there to untangle, Ms. Sherman demurred: “What people so often forget is that IPOs are tricky to price, especially for a company with so much uncertainty about future growth and performance,” she said in an e-mail.

No word on whether she would dock Mr. Aydinoglu’s grade for losing money on Facebook.

Dispatch from the Aftermath of the Facebook IPO