QuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: AlanQuoteOriginally posted by: Traden4AlphaQuoteOriginally posted by: trackstarQuoteOriginally posted by: ppauperit looks as though the IPO was priced exactly right if the closing price was so close to the offering priceIf you can take an educated guess at how many shares the underwriters bought back over the course of the day and what the price would have been like without their intervention, we might have a different view.As the article suggested above, they were pretty aggressive in the pricing and then increasing the number of shares in the offering at the last minute may have been a mistake.Indeed! If one thinks that FB shares come with an embedded "underwriter put" written @$38 and use any reasonable estimate of the likely volatility of FB (extremely high, for sure) to subtract the value of that put, then you'll realize that the naked shares are worth much much less than $38. The only uncertainty is the duration of the underwriter's price defense operations.There is another aspect to this. If you are an institution, you will get paid handsomely for lending your shares for many months.Let's say you can earn O(80%) per year for lending. Then, even if you think the stock is over-priced, would you buy it at $38to earn that extra yield for, let's say 6 months?Interesting! But I'm skeptical on three counts. First, I'm skeptical that an underwriter would do this because lending the shares would immediately create more selling that threatens to breach the $38 price point.Second, wouldn't a non-underwriter institution considering this strategy be more likely to by FB in the 39-$45 range than at the $38 barrier?. If FB holds at $38 barrier, then much fewer bears will want to pay 80% to borrow shares.Finally, this strategy only works if the rate of reversion to FB's rational price (based on current fundamentals and a more sensible P/E ratio) is less than 0.3%/day. If FB drops to $19 in the next month and the bears return the shares, the institution has only a 6.7% gain on the loan but a 50% capital loss.1. I didn't say the underwriter's would do it.2. Well, buying cheaper seems to me less risky.3. I never said it was riskless; it is an argument for buying if you think the stock is moderately, but not grossly overpriced.Obviously it requires an opinion about the floor vs the likely lending proceeds.The point is that the stock, at this point, comes with a big (effective) dividend.
Last edited by Alan
on May 18th, 2012, 10:00 pm, edited 1 time in total.