Pricing Of Public Issues

C P C F M

I n d i a n I n s t i t u t e o f F o r e i g n T r a d e

R o l l N u m b e r 1 3

v i v a s w a n _ o c f m 1 @ i i f t . a c . i n

[ P i c k t h e d a t e ]

Vivaswan Pathak

The report aims at providing an insight into the procedures involved

in a public issue – namely the Initial Public Offer (IPO) and Follow-on

Public Offer (FPO)

1

Objective of the Study……………………………………………………………………………………………………….2

Executive Summary……………………………………………………………………………………………………………3

Chapters…………………………………………………………………………………………………………………………….4

1 Initial Public Offering……………………………………………………………………………………………………….4

1.1 Overview………………………………………………………………………………………………………………………4

1.2 Role of Intermediaries…………………………………………………………………………………………………..5

1.3 Process………………………………………………………………………………………………………………………….6

2 Analysis……………………………………………………………………………………………………………………………8

2.1 IPO………………………………………………………………………………………………………………………………..8

2.2 FPO………………………………………………………………………………………………………………………………13

References…………………………………………………………………………………………………………………………20

Appendix …………………………………………………………………………………………………………………………..21

2

First we address the fundamental question that why a company comes out with public offering. Let us explain with example .Let’s say that you’ve always dreamed of opening a pizzeria. You love pizza, and you’ve done your homework to figure out how much it would cost to launch a new pizza business and how much money you could expect to earn each year in profit.

The building and equipment would cost $500,000 up front, and annual expenses (ingredients, employee salaries, utilities) would cost an additional $250,000. With annual earnings of $325,000, you expect to make a $75,000 profit each year. Not bad. The only problem is that you don’t have $750,000 (building + equipment + expenses) in cash to cover all of those costs. You could take out a loan, but that accrues interest. What about finding investors who would give you money in exchange for a share of the ownership of the restaurant? This is the logic that companies use when they make the decision to issue stock to private or public investors.

An initial public offering (IPO) or stock market launch is a type of public offering where shares

of stock in a company are sold to the general public, on a securities exchange, for the first time.

Through this process, a private company transforms into a public company. Initial public offerings are

used by companies to raise expansion capital, to possibly monetize the investments of early private

investors, and to become publicly traded enterprises.

A follow-on offering (often but incorrectly called secondary offering) is an issuance

of stock subsequent to the company's initial public offering. A follow-on offering can be either of two

types (or a mixture of both): dilutive and non-dilutive. A secondary offering is an offering of securities

by a shareholder of the company (as opposed to the company itself, which is a primary offering). A

follow on offering is preceded by release of prospectus similar to IPO: a Follow-on Public Offer (FPO).

The report aims at providing an insight into the various pricing techniques and the fundamental

difference between pricing of an Initial Public Offer and Follow-on Public Offer.

3

We summarize the basic definition and differences in an IPO and a FPO here.

An initial public offering (IPO) or stock market launch is a type of public offering where shares

of stock in a company are sold to the general public, on a securities exchange, for the first time.

Through this process, a private company transforms into a public company. Initial public offerings are

used by companies to raise expansion capital, to possibly monetize the investments of early private

investors, and to become publicly traded enterprises.

A follow-on offering (often but incorrectly called secondary offering) is one of the two types:-

1. This sort of secondary public offering is a way for a company to increase outstanding stock and spread market capitalization (the company's value) over a greater number of shares. Secondary offerings in which new shares are underwritten and sold dilute the ownership position of stockholders who own shares that were issued in the IPO. 2. Typically, such an offering occurs when the founders of a business (and perhaps some of the original financial backers) determine that they would like to decrease their positions in the company. This kind of secondary offering is common in the years following an IPO, after the termination of the lock-up period. Owners of closely held companies sell shares to loosen their position - usually gradually, so that the company's share price doesn't plummet as a result of high selling volume. This kind of offering does not increase the number of shares of stock on the market, and it is most commonly performed in the case of a company that is very thinly traded. Secondary offerings of this sort do not dilute owners' holdings, and no new shares are released. There is no "new" underwriting process in this kind of offering.

How follow on Public offering is different from initial public offering.

IPO is made when company seeks to raise capital via public investment while FPO is

subsequent public contribution.

First issue of shares by the company is made through IPO when company first becoming a

publicly traded company on a national exchange while Follow on Public Offering is the public

issue of shares for an already listed company.

Filing for an IPO and selling stock to the public is commonly called "going public" and can have several advantages. Going public gives business access to a large pool of potential investment capital that can help the business fund expansion. An IPO can also make a company more visible and recognizable to consumers, which can potentially help with marketing and attracting top talent. But on the other hand going through an IPO can be expensive because of fees associated with registration, commissions paid to underwriters, legal costs and other expenses. In addition, managers of corporations answer to a board of directors appointed by shareholders, which means they may not have freedom to act as they see fit. Publicly traded companies are also subject to oversight by the SEBI and must make certain financial and business information available to the public.

4

1 INITIAL PUBLIC OFFERING

1.1 OVERVIEW

A company planning an IPO typically appoints a lead manager, known as a bookrunner, to help it

arrive at an appropriate price at which the shares should be issued. There are two primary ways in

which the price of an IPO can be determined. Either the company, with the help of its lead managers,

fixes a price (fixed price method) or the price can be determined through analysis of confidential

investor demand data, compiled by the bookrunner. That process is known as book building.

Historically, some IPOs have been underpriced. The effect of "initial underpricing" an IPO is to

generate additional interest in the stock when it first becomes publicly traded. Flipping, or quickly

selling shares for a profit, can lead to significant gains for investors who have been allocated shares

of the IPO at the offering price. However, underpricing an IPO results in lost potential capital for the

issuer. One extreme example is theglobe.com IPO which helped fuel the IPO "mania" of the late 90's

internet era. Underwritten by Bear Stearns on November 13, 1998, the IPO was priced at $9 per

share. The share price quickly increased 1000% after the opening of trading, to a high of $97. Selling

pressure from institutional flipping eventually drove the stock back down, and it closed the day at $63.

Although the company did raise about $30 million from the offering it is estimated that with the level of

demand for the offering and the volume of trading that took place the company might have left

upwards of $200 million on the table.

The danger of overpricing is also an important consideration. If a stock is offered to the public at a

higher price than the market will pay, the underwriters may have trouble meeting their commitments

to sell shares. Even if they sell all of the issued shares, the stock may fall in value on the first day of

trading. If so, the stock may lose its marketability and hence even more of its value. This could result

in losses for investors, many of whom being the most favored clients of the underwriters.

Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to

reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise

an adequate amount of capital for the company. The process of determining an optimal price usually

involves the underwriters ("syndicate") arranging share purchase commitments from leading

institutional investors.

Some researchers (e.g. Geoffrey C., and C. Swift, 2009) believe that the underpricing of IPOs is less

a deliberate act on the part of issuers and/or underwriters, than the result of an over-reaction on the

part of investors (Friesen & Swift, 2009). One potential method for determining underpricing is

through the use of IPO Underpricing Algorithms.

5

1.2 ROLE OF INTERMEDIARIES

Book Running Lead Manager

The role of the BRLM can be divided into two parts, viz., Pre Issue and Post Issue. The Pre Issue

role includes compliance with the stipulated requirements of the SEBI and other regulatory

authorities, completion of formalities for listing on the Stock Exchanges, appointing of various

agencies such as advertising agencies, printers, underwriters, registrars, bankers etc. Post Issue

activities include management of escrow accounts, deciding the final issue price, final allotment,

ensuring proper dispatch of refunds, allotment letters and ensuring that each agency is carrying out

their part properly.

Bankers to the Issue

Bankers to the issue, as the name suggests, carry out all the activities of ensuring that the funds are

collected and transferred to the Escrow accounts.

Underwriters to the Issue:

An investment banking firm enters into a contract with the issuer to distribute securities to the

investing public. They get an Underwriting Commission for their services. In case of under

subscription, they have the obligation to subscribe to the left over portion.

Registrars to the Issue:

The Registrar finalizes the list of eligible allottees after deleting invalid applications and ensures that

the corporate action for crediting shares to the demat accounts of the applicants is done and the

refund orders, where applicable, are sent.

Stock exchange

The stock exchange a company chooses for its IPO is critical to its asking price. Also, each stock exchange may have its own regulations for controlling IPOs. Once a company's valuation and road shows are complete, the company must meet with a stock exchange regulator to ensure that appropriate trading documents are filed and there isn't a problem with the IPO price. For instance, the stock exchange might look at a company's potential share price and determine that it is unfair. If this is the case, the company must alter its IPO price.

6

1.3 PROCESS

The Beauty Contest A beauty contest is financial jargon for the courtship process that takes place as a company selects an investment bank to perform a transaction such as an initial public offering. During this process, each bank prepares pitches that demonstrate each bank’s expertise. Due Diligence Once the investment banks are chosen for the initial public offering, due diligence begins. An organizational meeting is held at company headquarters that usually consists of company management .Due diligence gives the underwriting managers an opportunity to kick the tires of the company and analyze it in as much detail as they can, diligence usually includes a tour of the company, a discussion of any legal issues including potential litigation, questions about how the company operates and what its plans are for future growth. Once the banks have collected enough information, they begin drafting the prospectus. The Prospectus A company that seeks to go public must have a prospectus. The prospectus is the legal document used to market the offering to investors. All the parties involved in the initial organizational meeting will have a hand in drafting the prospectus. A prospectus will go through dozens and dozens of drafts as lawyers, bankers and accountants scour over figures and legal wording. The drafting of the prospectus can take anywhere from five to ten weeks to complete. It is then filed with the SEBI and a preliminary prospectus or red herring is printed for marketing to potential investors. A red herring is so named because it has a disclaimer printed in red that the SEBI has not yet approved the offering. The preliminary prospectus is also printed without an offering price as the offering price will be determined after the syndicate has built a book for the offering. The Roadshow The roadshow is a term used to describe the marketing period of an initial public offering. During this period, the lead manager puts together a presentation for the management of the company as they travel to major financial centers meeting with investors. The lead manager also prepares a sales memo which contains key points for the syndicate to use as it pitches the offering to potential investors. The syndicate is the network of investment banks and their sales force of brokers that will sell the offering to the public. The syndicate will then use the red herring and the sales memo as they contact institutional investors and set up roadshow meetings. During the roadshow, the syndicate department builds the book for the offering. The book is a list of potential investors that includes how much stock they would like to purchase and at what price they are willing to buy it. The information compiled in the book is what is used to price the offering.

7

Pricing and Trading Once the final price of the offering is determined, the final draft of the prospectus is printed in preparation for the initial trading day. On trading day, shares are sold by each investment bank in the syndicate to investors. Each bank earns a fee — often around 7% — for each share that it sells and the net proceeds of the sale go to the company. Shares then immediately begin trading publicly as investors sell their shares to new investors — and a stock is born. By the end of the day, the market for the security will yield a closing price, which could be higher or lower than the price paid by the initial purchasers of the stock (the offering price). With publicly traded stock the company can now offer its shareholder liquidity and has a new avenue for raising money. Stock can also be used as a type of currency for acquiring other companies.

8

2 ANALYSIS

The following section explains some analysis of the data for some select companies.

The companies so selected have been chosen because of some special attributes. They are as

follows:

(i) Coal India: The most outstanding performer IPO, strong fundamentals of the company

make this a viable candidate for analysis.

(ii) Reliance Power : This is the biggest IPO after Coal India to hit the Indian market , so the

sheer size makes it worth analyzing

(iii) Reliance Petroleum: Though the company is now a part of Reliance Industries, the

uniqueness of IPO was that this was company’s second IPO.

(iv) Tata Steel: This FPO was analyzed owing to its size, performance and reputation of the

TATA group of companies.

(v) ONGC: The FPO has not yet hit the Indian Market, but it has already set the fever and is

pitching higher.

(vi) Engineers India Limited: This was chosen as it is a PSU, with a promoter holding in the

name of president of India.

2.1 IPO

a) COAL INDIA

Objects of the Issue:

The objects of the Offer are to carry out the divestment of 631,636,440 Equity Shares by the Selling Shareholder and to achieve the benefits of listing the Equity Shares on the Stock Exchanges.

Issue Detail:

»» Issue Open: Oct 18, 2010 - Oct 21, 2010 »» Issue Type: 100% Book Built Issue IPO »» Issue Size: 631,636,440 Equity Shares of Rs. 10 »» Issue Size: Rs. 15,199.44 Crore »» Face Value: Rs. 10 Per Equity Share »» Issue Price: Rs. 225 - Rs. 245 Per Equity Share »» Market Lot: 25 Shares »» Minimum Order Quantity: 25 Shares »» Listing At: BSE, NSE

CRISIL has assigned an IPO Grade 5 to Coal India Ltd IPO. This means as per CRISIL company has

'Strong fundamentals'. CRISIL assigns IPO grading on a scale of 5 to 1, with Grade 5 indicating

strong fundamentals and Grade 1 indicating poor fundamentals

9

Number of Times Issue is Subscribed (BSE + NSE)

As on Date & Time

Qualified

Institutional

Buyers (QIBs)

Non

Institutional

Investors (NIIs)

Retail Individual

Investors (RIIs)

Employee

Reservations Total

Shares Offered / Reserved 284,236,398 85,270,919 198,965,479 63,163,644 631,636,440

Day 1 - Oct 18, 2010 17:00 IST 0.6300 0.1800 0.1000 0.0000 0.3400

Day 2 - Oct 19, 2010 17:00 IST 3.3900 0.5400 0.3500 0.0100 1.7100

Day 3 - Oct 20, 2010 20:00 IST 24.7000 2.8900 1.1000 0.0400 11.8500

Day 4 - Oct 21, 2010 22:30 IST 24.7000 25.4000 2.3100 0.1000 15.2800

Listing Day Trading Information

BSE

Issue Price: Rs. 245.00

Open: Rs. 287.75

Low: Rs. 287.45

High: Rs. 344.75

Last Trade: Rs. 342.35

Volume: 192,839,607

NSE

Rs. 245.00

Rs. 291.00

Rs. 291.00

Rs. 344.90

Rs. 342.55

479,716,245

Price analysis after the release of the IPO

10

b) RELIANCE POWER

Objects of the Issue:

The objects of the Issue are to achieve the benefits of listing on the Stock Exchanges & to raise capital to 1. Fund subsidiaries to part-finance the construction and development costs of certain of 12 power generation projects currently under various stages of development; 2. General corporate purposes; 3. Achieve the benefits of listing on the Stock Exchanges.

Issue Detail:

»» Issue Open: Jan 15, 2008 - Jan 18, 2008 »» Issue Type: 100% Book Built Issue IPO »» Issue Size: 260,000,000 Equity Shares of Rs. 10 »» Issue Size: Rs. 11,563.20 Crore »» Face Value: Rs. 10 Per Equity Share »» Issue Price: Rs. 405 - Rs. 450 Per Equity Share »» Market Lot: 15 Shares »» Minimum Order Quantity: 15 Shares »» Listing At: BSE, NSE

Issue Subscription Detail / Current Bidding Status

Number of Times Issue is Subscribed (BSE + NSE)

As on Date & Time Qualified Institutional

Buyers (QIBs)

Non Institutional

Investors (NIIs)

Retail Individual

Investors (RIIs) Total

Shares Offered / Reserved

Day 1 - Jan 15, 2008 17:00 IST 16.2115 7.0231 0.8218 10.6800

Day 2 - Jan 16, 2008 17:00 IST 20.6947 6.9704 4.4065 14.4400

Day 3 - Jan 17, 2008 17:00 IST 30.6897 32.4070 9.0232 24.3600

Day 4 - Jan 18, 2008 17:00 IST 82.6190 190.0231 14.8716 73.0400

Listing Day Trading Information

BSE

Issue Price: Rs. 450.00

Open: Rs. 547.80

Low: Rs. 355.05

NSE

Rs. 450.00

Rs. 530.00

Rs. 355.30

11

High: Rs. 599.90

Last Trade: Rs. 372.50

Volume: 63,882,239

Rs. 530.00

Rs. 372.30

134,392,544

Reliance power before issuing bonus

Reliance power price analysis chart after issuing bonus

12

c) RELIANCE PETROLEUM

There have been two IPOs of Reliance Power. The first issue came in 1993 , then the company was

merged with Reliance Industries In 2002, which set up the 660,000 bpd refinery at Jamnagar in 1999.

. Later on , when it again became a separate entity it came out it again came out with another IPO

.Then again , it was merged with Reliance Industries in 2009

Reliance Petroleum opened for bidding on April 13, 2006. The price band was fixed at Rs 57 to Rs 62

and the bidding closed on April 20, 2006. This was the second time in the market for the

petrochemical major, after 1993 when it first came out with an IPO.

The company offered 45 Crore (450 million) equity shares for subscription.

Retail investors could bid for up to 1,600 shares at the upper end of the price band and they needed

to pay only Rs 16 per share at the time of bidding. The balance amount was to be payable on

allotment.

The company raised Rs 2,700 Crore (Rs 27 billion) through the IPO.

IPO size: Rs 2,172 Crore, year of issue: 1993

The company raised Rs 2,172 Crore (Rs 21.72 billion) through the IPO in 1993.

The original RPL, which was subsequently merged with Reliance Industries in 2002, floated the IPO

in September 1993 with a stated plan of commissioning its 9 million tonne capacity refinery by the

second quarter of 1996.

13

2.2 FPO

a) TATA STEEL

Objects of the Issue:

The objects of the Issue are to:

1. Part finance the Company’s share of capital expenditure for expansion of existing works at Jamshedpur; 2. Payment of redemption amounts on maturity of certain redeemable non-convertible debentures issued by the Company on a private placement basis; and 3. General corporate purposes.

Issue Detail:

»» Issue Open: Jan 19, 2011 - Jan 21, 2011 »» Issue Type: 100% Book Built Issue FPO »» Issue Size: 57,000,000 Equity Shares of Rs. 10 »» Issue Size: Rs. 3,477.00 Crore »» Face Value: Rs. 10 Per Equity Share »» Issue Price: Rs. 594 - Rs. 610 Per Equity Share »» Market Lot: 10 Shares »» Minimum Order Quantity: 10 Shares »» Listing At: BSE, NSE

Issue Subscription Detail / Current Bidding Status

Number of Times Issue is Subscribed (BSE + NSE)

As on Date & Time

Qualified

Institutional

Buyers (QIBs)

Non Institutional

Investors (NIIs)

Retail Individual

Investors (RIIs)

Employee

Reservations Total

Shares Offered / Reserved 19,425,000 8,325,000 19,425,000 1,500,000 48,675,000

Day 1 - Jan 19, 2011 17:00 IST 0.4200 0.0700 0.0400 0.0000 0.2000

Day 2 - Jan 20, 2011 17:00 IST 0.6700 0.7900 0.2000 0.0000 0.4800

Day 3 - Jan 21, 2011 17:00 IST 10.4100 7.2100 1.6000 0.0600 6.0300

14

Tata Steel FPO Listing Date

Listing Date: Wednesday, February 02, 2011

BSE Scrip Code: 500470

NSE Symbol: TATASTEEL

Listing In:

Sector: Steel

ISIN: INE081A01012

Issue Price: Rs. 610.00 Per Equity Share

Face Value: Rs. 10.00 Per Equity Share

Listing Day Trading Information

BSE

Issue Price: Rs. 610.00

Open: Rs. 630.15

Low: Rs. 615.65

High: Rs. 633.85

Last Trade: Rs. 625.70

Volume: 3,973,924

NSE

Rs. 610.00

Rs. 631.10

Rs. 615.80

Rs. 634.95

Rs. 626.25

15,400,454

Basis of allotment

Category No. of Applications No. of Shares No. of times subscription

A Retail Individual Bidders 185,711 30,289,150 1.52

B Non Institutional Bidders 475 59,819,760 7.01

C Qualified Institutional Buyers (excluding Anchor Investors) 169 202,756,450 10.07

D Eligible Employees 680 91,790 0.06

E Anchor Investors 33 9,659,680 1.16

Total 187,068 302,616,830 5.31

15

Tata steel price analysis before launch of FPO

Tata Steel price analysis post launch of FPO

16

b) ONGC

Few highlights about ONGC:

1. ONGC is a Fortune Global 500 company ranked 413. 2. ONGC is Asia's largest and most active company. 3. ONGC is at Rank 18th in top Global Energy Company Rankings. 4. ONGC contribute 77% of India's crude oil production and 81% of India's natural gas

production.

5. Objects of the Issue:

6. The object of the Offer is to carry out the disinvestment of 427,774,504 Equity Shares by the

Selling Shareholder.

7. Issue Detail:

8. »» Issue Open: »» Issue Type: 100% Book Built Issue FPO »» Issue Size: 427,774,504 Equity Shares of Rs. 5 »» Issue Size: Rs. [.] Crore »» Face Value: Rs. 5 Per Equity Share »» Issue Price: Rs. - Rs. Per Equity Share »» Market Lot: »» Minimum Order Quantity: »» Listing At: BSE, NSE

9. ONGC Pre-FPO and Post-FPO Shareholding Pattern

Percentage of

Shareholding

Name of the Holder(s) Pre-

FPO

Post-

FPO

President of India 74.14%

Indian Oil Corporation Ltd. 7.69%

Gas Authority of India Ltd. 2.40%

Life Insurance Corporation of India 3.06%

Public 1.95%

Others 10.76%

Total 100%

17

The FPO has been given a rating of 3.4

c) ENGINEERS INDIA LIMITED

Objects of the Issue:

The object of the issue is to carry out the divestment of 33,693,660 Equity Shares.

Issue Detail:

»» Issue Open: Jul 27, 2010 - Jul 30, 2010 »» Issue Type: 100% Book Built Issue FPO »» Issue Size: 33,693,660 Equity Shares of Rs. 5 »» Issue Size: Rs. 959.65 Crore »» Face Value: Rs. 5 Per Equity Share »» Issue Price: Rs. 270 - Rs. 290 Per Equity Share »» Market Lot: 20 Shares »» Minimum Order Quantity: 20 Shares »» Listing At: BSE, NSE

Engineers India FPO Tags:

Engineers India Ltd FPO, Engineers India FPO, Engineers India FPO Bidding, Engineers India FPO Allotment Status, Engineers India drhp and Engineers India Ltd FPO listing.

Issue Subscription Detail / Current Bidding Status

Number of Times Issue is Subscribed (BSE + NSE)

As on Date & Time

Qualified

Institutional

Buyers (QIBs)

Non Institutional

Investors (NIIs)

Retail Individual

Investors (RIIs)

Employee

Reservations Total

Shares Offered / Reserved 16,490,830 4,947,249 11,543,581 712,000 33,693,660

18

Day 1 - Jul 27, 2010 17:00 IST 0.0000 0.0000 0.0400 0.0000 0.0100

Day 2 - Jul 28, 2010 17:00 IST 0.9400 0.0100 0.1300 0.0300 0.5100

Day 3 - Jul 29, 2010 17:00 IST 23.4300 0.1400 0.4100 0.1000 11.6300

Day 4 - Jul 30, 2010 17:00 IST 23.4300 5.8500 2.9900 0.5700 13.3600

Engineers India FPO Listing Date

Listing Date: Thursday, August 12, 2010

BSE Scrip Code: 532178

NSE Symbol: ENGINERSIN

Listing In: B Group

Sector: Consulting Services

ISIN: INE510A01028

Issue Price: Rs. 290.00 Per Equity Share

Face Value: Rs. 5.00 Per Equity Share

Listing Day Trading Information

BSE

Issue Price: Rs. 290.00

Open: Rs. 315.00

Low: Rs. 315.00

High: Rs. 329.80

Last Trade: Rs. 321.15

Volume: 3,766,509

NSE

Rs. 290.00

Rs. 315.40

Rs. 315.40

Rs. 330.00

Rs. 320.95

8,918,145

19

Price Analysis Post Launch of FPO

Price Analysis before the launch of FPO

20

WEBSITES

(I) Bloomberg www.bloomberg.com

(ii) Money control www.moneycontrol.com

(iii) Financial Times www.ft.com

(iv) Angel Broking www.angelbrolking.com

(v) Yahoo finance www.in.finance.yahoo.com

(vi) Rediff business www.business.rediff.com

(vii) Bombay Stock Exchange www.bse.com

(viii) National Stock Exchange www.nse.com

(ix) Nasdaq www.nasdaq.com

(x) Investopedia www.investopedia.com

BOOKS

(i) The Indian Financial System , Markets , Institutes and Services

Bharati V. Pathak

Pearson publications

21

FACEBOOK IPO

The social networking company Facebook, Inc. held its initial public offering (IPO) on May 18,

2012.[1] The IPO was one of the biggest in technology, and the biggest in Internet history, with a peak

market capitalization of over $104 billion.

There was an estimate cut by the underwriters signaling the weak growth of the company in the second quarter. The estimate cut, moreover, was followed by three additional pieces of information that were interpreted negatively by some institutional investors:

1) The price range for the deal was increased, which made the deal even less attractive in light of the estimate cut,

2) The size of the deal was increased, which meant that more stock would be sold, and

3) Many smart institutional Facebook shareholders like Goldman Sachs decided to sell more stock on the deal—the "smart money," in other words, was cashing out.

Institutional investors, having digested the news of the underwriter estimate cut, were comfortable buying Facebook stock at $32 a share.

Retail investors, meanwhile, who were presumably unaware of the estimate cut, were comfortable buying Facebook at $40 a share.

Knowing that a big percentage of the IPO stock could be sold to retail investors instead of institutional investors, Facebook and Morgan Stanley decided to price the IPO at $38. Ultimately underwriters settled on a price of $38 per share, at the top of its target range.

First day

Trading was to begin at 11:00 am Eastern Time on Friday, May 18, 2012. However, trading was

delayed until slightly half an hour due to technical problems with the NASDAQ exchange. Those early

jitters would foretell ongoing problems; the first day of trading was marred by numerous technical

glitches that prevented orders from going through, or even confused investors as to whether or not

their orders were successful.

Initial trading saw the stock shoot up to as much as $45. Yet the early rally was unsustainable. The

stock struggled to stay above the IPO price for most of the day, forcing underwriters to buy back

shares to support the price. Only the aforementioned technical glitches and underwriter support

prevented the stock price from falling below the IPO price on the first day of trading.

22

At closing bell, shares were valued at $38.23, only $0.23 above the IPO price and down $3.82 from

the opening bell value. The opening was widely described by the financial press as a disappointment.

Despite technical problems and a relatively low closing value, the stock set a new record for trading

volume of an IPO (460 million shares). The IPO also ended up raising $16 billion

Aftermath

The IPO had immediate impacts on the stock market. Other technology companies took hits, while

the exchanges as a whole saw dampened prices. Investment firms faced considerable losses due to

technical glitches. Bloomberg estimated that retail investors may have lost approximately $630 million

on Facebook stock since its debut The IPO impacted both Facebook investors and the company

itself. It was said to provide healthy rewards for venture capitalists that finally saw the fruits of their

labor.] In contrast, it was said to negatively affect individual investors such as Facebook employees,

who saw once-valuable shares become less lucrative.[13] More generally, the disappointing IPO was

said to lower interest in the stock by investors. The IPO could jeopardize profits for underwriters who

face investors skeptical of the technology industry. In the long-run, the troubled process "makes it

harder for the next social-media company that wants to go public." Reuters' Alistair Barr reported

that Facebook's lead underwriters, Morgan Stanley (MS), JP Morgan (JPM), and Goldman

Sachs (GS) all cut their earnings forecasts for the company in the middle of the IPO roadshow.] Some

have filed lawsuits, alleging that an underwriter for Morgan Stanley selectively revealed adjusted

earnings estimates to preferred clients. The remaining underwriters (MS, JPM, and GS) and

Facebook's CEO and board are also facing litigation. It is believed that adjustments to earnings

estimates were communicated to the underwriters by a Facebook financial officer, who in turn used

the information to cash out on their positions while leaving the general public with overpriced shares.

Additionally, a class-action lawsuit is being prepared] due to the trading glitches, which led to botched

orders. Apparently, the glitches prevented a number of investors from selling the stock during the first

day of trading while the stock price was falling - forcing them to incur bigger losses when their trades

finally went through.

In June 2012, Facebook asked for all the lawsuits to be consolidated into one, because of overlap in

their content. Facebook's IPO is now under investigation by SEC and has been compared to pump

and dump schemes. Massachusetts Secretary of State William Galvin subpoenaed Morgan

Stanley over the same issue.