Lyft’s shares have been on a small roller coaster ride in its first six trading days. The stock was priced at $72 on Thursday, March 28, and started trading on Friday, March 29. It opened at $87.33, quickly traded at a high of $88.60 and closed at $78.29, up $6.29 or almost 9% on its first day of trading.
It kept falling on Monday, April 1, and closed at $69.01, down over $9 and essentially $3 under the price initial investors paid for the stock on Thursday. It moved up slightly over the next three days and closed on Thursday at $72.00, exactly what it was offered to initial investors. It experienced a strong day on Friday, increasing $2.45 or 3.4% to $74.45, which is probably a sigh of relief to the company, its Investment Bankers and investors who were able to obtain the stock at its $72 IPO price.
Investors don’t want to see a stock they bought go down. Companies who sold the stock don’t want to see the value of the company go down. And Investment Banks or IB’s especially don’t want to have the shares of a company they took public go below the offering price, or break price, since it can impact their ability to get private companies to use them in going public.
It is openly talked about that Investment Banks “support” a newly printed IPO’s stock. Here is how it is done using Lyft as an example.
How an Investment Bank “stabilizes” an IPO
Lyft offered 30.77 million shares in its IPO, which were priced at $72. In the prospectus the underwriters or the Investment Banks were given the option to purchase an additional 4,615,500 shares or 15% of the offered number. The 15% is called the “greenshoe” which comes from the first company to permit IB’s to do this.
When the IPO stock is placed or sold to the initial investors all 35 million plus shares (the 30.77 million plus the extra 15% greenshoe) are actually sold at $72 but the company, or Lyft in this case, only initially receives the proceeds for the 30.77 million shares or $2.2 billion.
One or two of the Investment Banks are assigned the role to “stabilize” the stock. What they do is by selling the 4.6 million greenshoe shares they have created a short position in them. The IB can now buy back these shares but only if they are below the $72 offering price over the first 30 days, otherwise it would be stock manipulation. This helps create demand for the stock but the IB only has so much “fire power.”
What impact could this have?
How much of an impact the stabilization can have will depend on how many shares are being traded and how far under the offering price the stock is. It is always hard to pinpoint how much sway this could have, and in Lyft’s case it can be even more challenging, since so many shares traded in the first few days.
On its first day of trading over 71 million shares changed hands, which was over twice the number of shares offered. While an IB tries to place at least some of the initial shares with investors who will hold onto them, the temptation to flip the stock from $72 to somewhere in the $80’s in the first day is just too tempting.
Note that the IB wouldn’t have been involved the first day since it never traded below the $72 offering price.
However, just after the market’s opening on Monday the stock fell below $72 and for the day almost 42 million shares traded. It hit a low of $66.10 during Tuesday’s trading when over 22 million shares exchanged hands. It stayed below $72 for all of Wednesday when over 15 million shares traded. On Thursday the shares crossed above $72 (but traded just below for most of the day) and closed on Thursday exactly at $72. So the IB in charge of stabilization could have used up all of its 4.6 million shares in four days.
It started strong on Friday, opening at $73.94 and closed at $74.45. One of the major reasons was Citron Research, a well-known short investor, recommending against shorting Lyft. Citron disclosed it has been a Lyft investor for two years and laid out five reasons in a note titled, “LYFT – The Amateur Short.”
Who makes or losses money on the greenshoe shares
If the IB does wind up using part or the entire greenshoe there are two additional impacts.
- The IB winds up making some more money since they sold the shares at $72 and bought them back at a lower price
- However, an IB will gladly forgo whatever additional money this would bring in to not have the IPO look like it was not priced well
- The company receives the amount of money that the IB paid for the stock, which would be whatever price under $72 was paid in this example
- If the worst price the IB paid winds up being the $66.10 low, Lyft will receive an additional $300 million
- At $70 Lyft will receive about $325 million
If the shares had stayed above $72 the entire 30 days, Lyft would receive the full $332 million.