Reading the tea leaves on what’s likely to happen with the debut of Alibaba Group Holdings isn’t an easy task given a few of the weird quirks of this IPO that come into play. Shares will start trading in an hour or so after the open of trading on the New York Stock Exchange, and while it’s tempting to think the various wrinkles that come with the stock will prevent it from being as volatile as first-day activity is in hot deals, it’s hard to see how it doesn’t turn out any other way than the usual crazy way.
The company has made a show of saying it wants most of the shares to end up allocated to the fewest of large shareholders possible – the big active managers (since index funds can’t get in there just yet) and sovereign wealth funds that see this as a long-term play to appreciate over a period of time. Fund managers are in the midst of finding out how well they did (and with about 40 institutions requesting $1 billion allocations on a $22 billion deal, a lot of people are going to walk away from the table hungry), and the dynamic it creates after the open is sure to create a lot of activity.
Finance professor Jay Ritter laid it out pretty well in a Reuters story, pointing out that those that don’t get what they want and instead get a heck of a lot less – say, 1000 shares instead of 15000 – might turn into sellers rather than buyers, especially if the early anticipation for the stock among hedge funds, retail investors and other types who won’t get much of the first bite of the deal dive in for a chance at the company on its first day. If that happens, as one event-driven manager put it, it changes the calculus. A $68 stock that trades at $68.50 stays in an investor’s portfolio; a stock that jumps to $90 a share is another story, and institutions that don’t get what they want might take their gains and go home, thankyouverymuch. In addition, as Alibaba is selling 320 million shares along with an additional 128 million or so that could hit the tape as a result of not being restricted through lockup predictions, it’s hard to expect anything but a heck of a lot of trading in its debut.
Twitter’s first day of trading was 117 million shares in the fourth quarter of 2013, and Visa’s first day volume was 177 million shares. General Motors, in its return to the market after restructuring, had 458 million shares traded in its first day. The infamous Facebook IPO saw 580 million shares of trading on its first day, but some of that has to be attributed to the epic snafu that accompanied that offering and the inability of investors, market-makers and traders to make heads or tails out of what was going on (it’s not a record Alibaba wants to emulate…but of course Facebook debuted on the Nasdaq, not the NYSE). There were a number of other big deals that opened up with volume of 40 to 50 million shares in the first day, but Alibaba seems assured to exceed that.