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Comment by jpdoctor | Hacker News Reader

A lot of misunderstanding about the greenshoe...

It's really simple: The IPO sells X+Y shares, where X is the big IPO number of shares and Y is the "over-allotment".

If the stock trades above the IPO price, the money from selling Y shares is given to the IPO company along with the rest of the money from selling X shares.

If the stock drops below the IPO price, the underwriters start buying back (up to Y shares * IPOprice) using the money from the initial over-allotment.

It is one of the few times outright price manipulation is allowed (which should be a completely different discussion, and likely why MS declined comment.)

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"It is one of the few times outright price manipulation is allowed (which should be a completely different discussion"

I'm curious to know what arguments are in favour of it. If they're incorrectly pricing the IPO, surely they should suffer for it and adjust their pricing models and strategies rather than be allowed to manipulate their way around what's pretty much their own mistake?

I don't know much about how companies go public but it sounds like a good portion of the stock is issued to "investors" at or below the IPO price who then immediately go on to sell that stock to the public when trading is opened? So the downside of pricing the IPO too low is the company won't receive as much for the shares as they could have. Presumably just issuing the shares directly to the public during the IPO seems like the way to capture the best price? Is the problem that the exchange doesn't allow for the issuing of shares, only the trading of shares, so somebody needs to own them first? I'm sure there's a good reason why but what is it?

Simply put, the argument is that the the 'price' of price manipulation is one the market (read: the purveyors of the exchange who get to make the rules) are willing to allow in exchange for an orderly, stable market. IPOs are hectic times, and they want some stability while the dust settles.

So if I understand what you're saying, does this mean there are less total shares released into the market than there would have been if the price went up instead of dropping?

In the case where the price goes up, the shares to cover the short are sold by Facebook to MS right? In the case that happened yesterday the shares came from the marketplace which means those shares are now no longer in the market right? Where in the case of the stock going up, those shares would have stayed in the market.

Basically what I'm getting at is this could be viewed as a good thing right? It means that the total outstanding shares is now less than it could have been had the stock gone up. Right?

First: Stop thinking of it as a short. The underwriters are not short because of the overallotment; They've sold those shares along with all the "normal" IPO shares to mutual funds, pension funds etc. They are never obligated to "cover the short", the shares are permanently issued.

> does this mean there are less total shares released into the market than there would have been if the price went up instead of dropping?

Yes. When the share price hit 38, it is likely that MS took the money earned from selling those over allotment shares and bought a bunch of shares back.

> Basically what I'm getting at is this could be viewed as a good thing right? It means that the total outstanding shares is now less than it could have been had the stock gone up. Right?

That is an optimists view. The pessimist might say "This is a bad thing: The demand was low enough that the full greenshoe was not sold along with the IPO."

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