Given the insane hype surrounding the Facebook IPO, it should really have come as no surprise to anyone that it’s being perceived as a massive flop. (A search at the NY Times website turns up no articles about Cisco Systems 1990 Initial Public Offering (Feb 16, 1990 at a split-adjusted price of $0.06); it does turn up a story that references Cisco’s Restaurant, Bakery and Bar in Austin, TX). In fact, it has been widely reported that the underwriters had to step in to prevent the stock from falling below its $38 issue price, which would have truly been an unmitigated disaster. While investors stood to make a bit of money from the Facebook IPO (if they timed their sale right), it clearly did not live up to the breathless media coverage of the last several weeks. It was all too reminiscent of the “Countdown to PALM” we were treated to a dozen years ago on CNBC (who remembers that?). And while the contrarian in me wants desperately to get long FB when I see “Experts Say Now’s Not the Time to Buy Facebook,” my gut tends to agree.

The wildcard in the FB offering, to me, was the fact that no one could quantify the brand name recognition and what its potential impact would be on investors’ appetites. With [fill in the blank] hundreds of millions of “users” (however you choose to define them), how many of them would want in? (20/20 hindsight answer: Apparently not enough.)

In the end, the age-old Wall St. adage proved true yet again: Retail investors should be circumspect (to put it politely) of any offering they’re able to get their hands on. If you can get it, chances are you don’t want it.

How does the syndicate process generally work on the retail side? Herewith, a primer.

Every office has a designated syndicate coordinator whose job it is to work as a liaison with the syndicate desk that handles the allocations to the branch offices. Once upon a time it was the coordinator’s job to poll his advisor colleagues for their interest (Indications of Interest, or IOIs, in street jargon) in each deal on the calendar and subsequently “indicate” for X shares of stock from the desk. Back in the day, the institutional/retail split was fairly equitable, and the coordinator could, with some exceptions, be fairly confident that he’d get the number of shares from the desk for which he’d indicated. The system worked for everyone.

Over the years, notably throughout the internet/technology bubble, Day One “pops” – huge gains from the issue price – became fairly common place, producing outsized profits for IPO recipients. Consequently, firms began to use IPO shares as carrots to their institutional accounts (to do additional business) and the institutional/retail split became absurdly lopsided in favor of the institutional side. Except, of course, when it came to REITS or companies that arguably should not have been going public in the first place (read: dogs that would open flat, trade down from there and never recover) – there was, is, and always will be plenty of those for the retail side of the house.

Although coordinators generally did a fair and equitable job of handing out the allocations they got from the desk, some squeaky wheels (every business has more than its share), decided they weren’t getting their due, or that coordinators were playing favorites to the whiners’ detriment, or that there was no clearly defined process (there wasn’t, really) or some such. Complaints and perhaps a lawsuit or two ensued, and a process was established for syndicate participation. But that’s another (fascinating) story.

Eventually, as the balance between institutional and retail allocations became more and more lopsided, the coordinator’s aggregate IOI to the desk became largely symbolic, as there became no chance retail would be handed enough stock to satisfy demand in even a lukewarm deal. I’ve heard of innumerable offerings where large retail offices (100+ advisors) get allocations of 500 or 1,000 shares total to divvy up among all those advisors. The notion of going to a high or ultra-high net worth client with 50 shares of a deal priced at $30 – a $1,500 principal investment – is beyond laughable. But that became the norm. Like Mom used to say at mealtime: “You have two choices for dinner: take it or leave it.”

Fast forward to Facebook. For weeks, perhaps months, every communique from syndicate desks street-wide cautioned retail offices that allocations would be very small and that clients’ expectations needed to be managed – standard language for any deal that has a decent chance for an opening day pop. It’s situations like those that are the syndicate coordinator’s worst nightmare – not nearly enough stock and way too many mouths to feed. This was the case right through last Thursday, when allocations were expected to go out to the offices.

And then came the stock. A flood of it. More than anyone, anywhere, expected. Advisors who’d indicated for stock got more than they’d asked for. Those who didn’t even indicate – or didn’t rank highly enough on the process-driven totem pole to get stock – suddenly found themselves awash in stock they never expected to get, and that they had told clients to forget about. The unconfirmed word was that FB had instructed its underwriters to broaden retail participation (but even that would not account for what was unleashed on retail).

And then the fun began. Given all the regulatory changes of the past few years, clients now need to certify their eligibility to participate in the IPO market. Yes, really, they do. A copy of the form they need to sign and submit can be found here. Well, guess what? Since retail syndicate has more or less become a running joke, no one had these forms on file. Hilarity ensued, as brokers emailed these forms to clients, who signed them and got them back (via fax or scan/email). They then had to be signed off on at both a local level and in document control, which was quickly overwhelmed to the point of multi-hour delays in processing. To all participants’ great credit, however, I hear any and all available resources were thrown at the problem and that, in the end, no one who wanted to participate was unable to do so.

In the end, no harm no foul, I suppose. Morgan Stanley and the syndicate stepped in to support the stock at $38, so no one who’d gotten IPO shares has (yet) taken a loss. Anyone who did not participate in the IPO had the opportunity, late in the day, to buy all they wanted at the IPO price. Who really comes out of this looking the worst, in my very humble opinion, is the media, which just can’t help itself these days. If it had not been all Facebook, all the time, 24/7, for the past month, perhaps this would not now be viewed as such a huge disappointment which, truth be told, it’s not. A new, different type of company (i.e. “social media”) went public – just like CSCO did in 1990. It is, as Zuckerberg said, a milestone, but by no means an end in and of itself. Absent the record-setting hype that surrounded this deal, things worked more or less the way they’re supposed to. It was the ridiculous doubles and triples of the late 90s early 2000s that were the anomalies.

 

 

 

Category: IPOs, Markets

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

22 Responses to “Syndicate: If You Can Get It, Run The Other Way”

  1. PeterR says:

    Thanks Invictus for the details.

    Fa(r)ceBook !!!

  2. TLH says:

    I feel this is a reflection about how Main Street feels about wall street. Even the mob cannot keep up with Wall Street and the politicians in DC.

  3. gabbyjohnson says:

    I’m just a layman here, CPA by trade/business owner – but if I were selling part of my company and was able to raise the funds I expected on opening day of the IPO without a massive ‘run-up’ in price on day 1, I’d be rather happy about it.

    Unlike the Linked In IPO – What happened there?? Billions left on the table for someone to ‘clean up’, but who?? Given BRs nice part on how the syndication process works today – I’m not understanding.

    BR – if you could offer up your perspective on the Linked In IPO vs. Facebook in regard to opening day pricing – I think that’d be rather interesting. 2 rather similar businesses with wildly different opening days.

    Thanks.

    Invictus: What I would say is that as an underwriter, it’s desirable to have your IPO players – hedgies, mutual funds, other institutional investors – always wanting to come back for more. Nothing accomplishes that goal like a first day “pop” through which those who bought at the IPO price have a chance to flip their stock and exit on Day One. But the pop is much more art than science, due to the vagaries of the public markets. Ideally, it’s enough to satisfy the larger IPO players but not so much that the management team of the company going public feels cheated by what they believe may have been the underwriters’ underpricing of their stock. A fine line indeed. In a nutshell, FB was a bit overpriced, as the syndicate was forced to buy stock to defend the issue price – not the ideal situation for them, but just peachy for Zuckerberg and team. LNKD stands in stark contrast – the deal was underpriced, and rose as much at 171% on its first day of trading, making those lucky enough to get in on the IPO lots of dough, but starving the company of all those extra millions it could have raised.

  4. gabbyjohnson says:

    Sorry – guess Invictus wrote this piece – please replace BR w/ Invictus on my post.

  5. donna says:

    I’m just pissed they have all that money now tro buy up truly innovative companies and ruin them. It’s Google all over again.

  6. wally says:

    “With [fill in the blank] hundreds of millions of “users” (however you choose to define them), how many of them would want in?”

    An incredible majority of Facebook users do not have the money or the know-how and, anyway, do not give a damn about buying Facebook stock. I’m not saying that makes Facebook a bad investment because, as the saying goes, never overestimate the intelligence, etc., etc.
    It is proven that appealing to the lowest common denominator is a good path to fortune.

  7. macrotrader603 says:

    great post

  8. Lyle says:

    Actually the system worked out for FB as well as could be expected they got the high price for their shares. Of course if I could fix the system it would be a reverse auction where one places a bid for x shares at y dollars. Then when the time to price came, the computers would go down the list until the number of shares desired is equal to the number of shares available, and the last price would be the offering price.
    No allocation, and the brokers (other than putting the bid screen on their web sites drop off the scene).

  9. rd says:

    According to Efficient Market Theory, the buyers and sellers would have all of the information neexed to accurately price it on the day it comes out.

    The seller would want to maximize the funds they receive from going public while the buyers would want a fair price. Theoretically, with no new information on the first day of trading, the issue should end up at about the IPO price.

    If the company is worth a high P/E multiple at the IPO, then clearly the concept is that this will be a company that will be growing for a long time. The investors should expect to get dividends or the stock price will be substantially higher a few years later. Buying an IPO on the expectation of a pop with a quick flip is speculation, not investing.

  10. MojaveMax says:

    Interesting that Invictus and Boockvar are sucking Facebook c0ck as hard as they can, while BR stays on the sidelines.

    Invictus: Not sure about your inference there in any event, but Barry’s on the record calling the FB pricing “piggish.”

  11. biscuits says:

    vagaries = muppets didn’t show up to play
    ” But the pop is much more art than science, due to the vagaries of the public markets.”

  12. [...] Syndicate: If You Can Get It, Run The Other Way Big Picture. FaceBorg post mortem. [...]

  13. [...] Invictus, “Retail investors should be circumspect (to put it politely) of any offering they’re able to get their hands on. If you can get it, chances are you don’t want it.”  (Big Picture) [...]

  14. StatArb says:

    CSCO has $69 million of revenues and $14 million profits in 1990 (FY july) and the founders weere forced out shortly thereafter

  15. NoKidding says:

    Thanks that’s a really good article.

  16. techy says:

    is it low risk trade to buy FB when it falls below 38.10 and flip it when it goes above $39? i mean how long are the underwriters supposed to support the IPO price?

  17. moregusto says:

    Where is the Occupy outrage?? Is it fair that Zuckerber gets $20B? Oh that’s right, he’s an Obama friend so that is OK.

  18. Tioga says:

    Whoever wrote this is essentially correct. Omitted from the essay is the practice of waiting to see how the offering is going before ‘allocating ‘ the stock to individual accounts. After the institutions are fed at the opening, and the leftovers are to be fed to retail customers, the underwriters (who have bought the stock from the company) inform the retail salesmen how many shares they have to allocate among their customers. If there isn’t enough to go around, the retail salesmen allocate the stocks that rise to a premium to their relatives and friends, and leave their ordinary customer out in the cold. But if, the stock is not doing well, they by-pass their relatives and friends and give it to their ordinary customers. Heads one group wins, tails the same group loses. Crooked and dishonest? Cheating? Unfair? Just another example of Wall Street ethics and morals.

  19. RC says:

    Invictus,
    I think the Facebook ipo was a sign of cynical and contemptuous disregard that Wall Street has for the retail investor.
    The theory was that there are so many suckers out there ready to buy this lemon, lets price it way up there and laugh all the way to the bank.
    Apparently the retail investor is a tad smarter than Wall Street is willing to give him/her credit for.

    This mess is potentially going to cost Merrill Lynch huge and that would be the retail investor’s win over Wall Street. It will be sweet.

  20. Fred C Dobbs says:

    Tioga reminds me of something. I was told by one who founded a successful broker/dealer/underwriter that he only bought and quickly sold IPOs. He calendared and followed IPOs through the journey they go through from registration to sale to the public, and followed the prices at which they sold from issuance (when the price is fixed) to 5 or 10 days after the price of the stock was no longer supported by the underwriter syndicate. If he could sell for a profit, he bought the stock at the ‘opening,’ and immediately sold and took his profit. Otherwise he passed. He followed all of the IPOs to get a ‘feel’ for the IPO market. If three IPOs in a row sold to a premium, he entered the market, and, if three in a row failed to rise, he left. He didn’t care about anything else, whether the company was ‘green,’ sold tobacco etc. etc. etc. He said this was best way he knew to make money in the market. All other ways were just a bunch of statisticians arguing. They could tell you a lot about the direction “market’ etc. but they couldn’t tell you anything about the price of a given company stock. He said it was just like your doctor telling you a lot of people died from smoking, but he couldn’t tell you if you would die from smoking. He died a multi-millionaire. many times over.

  21. Conan says:

    Bottom Line you have to know what you are investing in. I am sure someone will make big money on this and it won’t be luck.. However if you don’t have specilized knowledge or access, why would you invest in any IPO??

    Make a plan, test it, implement it and modify it as your knowledge / experience grows. If not you are not an investor, you are not a trader ====> If you aren’t disciplined and sytematic then you are a novice gambler depending on luck and really how much money do you expect to make?

    I suspect there are a lot of gamblers in this market and in particular when there is a lot of hype like this IPO. Bees to honey or better said flies to ……

  22. dss says:

    Invictus,

    Thanks for the great post, we need more people to pull the curtain back on the “business as usual” on Wall Street.

    Over the years people have offered us business “opportunities” that we refused using the same principle; why are you offering ME this fabulous opportunity? If it were such a great deal it would have been snapped up by the usual suspects, family, friends, and business associates, the fact that you are approaching me tells me everything I need to know.