Facebook went public and at the last minute filled all the demand out there, leaving the stock wide open for short sellers. The price was soon cut in half. Bad for investors who bought the hype, but great for the company which soaked up all the available cash. Eventually, the stock came back.
Chart courtesy of Stockcharts.com
The first day price jump tells us Twitter obviously could have sold more stock. Great for the investment banker's clients who got in on the deal. Good for Twitter?
We maintain that leaving a little money on the table is a good idea. A rising price makes shareholders happy. A drastically falling price makes them unhappy and likely to sue, or at least unwilling to buy more or buy again.
Look at it this way, if you were running a restaurant, would you want to serve cheap food that gave your customers food poisoning in order to save a few bucks? Or would rather service them more quality than they paid for so that they are eager to return?
Another issue is Section 11 of the Securities Act. Section 11, well known to all underwriters, makes the company liable for an untrue statement of a material fact or an omission of a material fact that makes the information misleading.
Any purchaser who buys, even in the aftermarket, can sue. They do not have to prove that the misstatement caused the loss, or that they relied on the misstatement.
This is absolute liability. There was misleading information in the prospectus, the investor wins.
Damages are the difference between the purchase price and the market price.
I can just imagine the plaintiffs' attorneys studying the Facebook prospectus and drooling with greed.
While the issuer is absolutely liable, the underwriter can show that they did proper due diligence and had no reason to know that there was a misstatement. This is not much of a defense as when something goes wrong, people assume they should have caught it. This is near absolute liability for the underwriter.
The real defense of the underwriter is that the stock is still selling above the IPO price.
Now we get to the question of Twitter. It went up wildly. It is true it is very hard to judge demand before the stock starts trading, but certainly this much demand should have been noticed.
Having the price start at a huge premium will probably mean that it will swing down. The price is likely to be volatile. While volatility will increase volume of trading, too much volatile will scare institutions.
While we recommend leaving some cash on the table to keep investors happy, Twitter appears to have overdone it. The long case for the stock remains to be realized and too much up may make the price vulnerable to attack, especially if there is a hiccup in the results.
Interestingly enough, not leaving money on the table, and leaving too much, gives short sellers a great opportunity.
