It was another Wall Street bailout — but this time the banks had to cough up the cash.
Facebook’s underwriters propped up the social-network’s trading debut yesterday, as the shares threatened to crash through the initial public offering price of $38.
The banks working on the massive $16 billion IPO, including Morgan Stanley, JPMorgan Chase and Goldman Sachs, did their duty by buying up large blocks of Facebook stock toward the end of the day to support the price.
Facebook shares opened up 11 percent at $42.05, and traded as high as $45, before running out of steam, disappointing investors hoping for a big first-day pop. The shares closed up just 0.6 percent at $38.23.
Without the bank bailout, Facebook’s IPO would have been a loser on the day, Wall Street insiders said.
The heavy buying, however, cut into the banks’ already meager fees on the deal. The underwriters agreed to accept a smaller cut — just 1.1 percent of the $16 billion Facebook raised in the IPO — in order to land the high-profile assignment.
After splitting $176 million in fees, the firms likely spent more than they made in fees by buying the swooning stock. Sam Hamadeh, CEO of research firm Privco, believes the banks spent around $380 million on Facebook stock.
“On the heels of JPMorgan’s $2 billion ‘hedging’ trading loss, tThe underwriters have used up all the fees they made on the Facebook deal just to buy and prop up the stock to prevent a busted IPO,” said Hamadeh.
Another source said that the banks took a substantial hit yesterday, which started strong despite glitches that delayed Nasdaq trading in Facebook shares by 30 minutes past their 11 a.m. scheduled debut.
While there was plenty of finger-pointing yesterday, many blamed the bankers for setting the price too high to allow for upside. The IPO share priced at the high end of the $34 to $38 range, which had been raised from an initial range of $28 to $35.
The bankers were wary of pricing the shares too low, leaving money on the table and leading to an outrageous first-day pop. They were shooting for a modest first-day gain in the range of 5 percent to 10 percent.
Still, some observers heaped scorn on Facebook insiders who dumped their shares, saying it was a red flag that weighed on the stock.
Facebook had increased the number of shares being sold in the IPO by 25 percent, to 425 million, with most of the additional float coming from early investors looking to cash out.
The company’s sky-high valuation also made some investors queasy. At $38 a share, Facebook is valued at $104 billion — even though it only made $3.7 billion last year.
Facebook’s big day was a drag on other tech stocks. Trading in shares of Zynga was halted yesterday after a sharp drop, and the stock closed down 13.4 percent at $7.16. China’s social network RenRen was also down more than 20 percent, to $4.93.
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