Stabilizing Bid

What Is a Stabilizing Bid?

A stabilizing bid is a purchase of stock by underwriters to stabilize or support the secondary market price of a security immediately following an initial public offering (IPO). After an IPO, the price of the newly issued shares may falter or be shaky in trading.

How a Stabilizing Bid Works

After a company has made the decision to go public and conduct an IPO, it will vet a number of underwriters for expertise in valuing the company's equity, helping with marketing and distribution, conducting sell-side research support, and coordinating trading functions. Once the IPO price has been set by the underwriter, and the issuer's shares make their debut in the public, it is in the best interest of the issuer that the shares are well-received. This translates to a higher stock price upon release into the market. The stabilization bid helps to make sure that the trading price does not fall below the IPO price, which is crucial for a company that doesn't want to risk a negative perception after going public.

To prepare for this risk, a company may grant the underwriters a greenshoe option–also known as an overallotment option–that allows the underwriters to oversell or short sell up to 15% more shares than initially offered by the company. If the price wavers shortly after the stocks are issued and demand is weak, the underwriters will step in and make a stabilizing bid. This involves buying back the shorted shares. Creating this extra source of demand for the newly-issued shares helps to stabilize the stock price, keeping it above, or at least around its issue price.

Example of a Stabilizing Bid

In mid-2017, Blue Apron Holdings Inc. went public at a price of $10 per share. The underwriters had initially indicated a range of $15 to $17 per share in the weeks leading up to the IPO. This was a clear indicator that demand would not be as strong as the company had hoped. Blue Apron sold 30 million shares to the underwriters, but with the 15% overallotment, the underwriters sold 34.5 million shares to investors. This left the underwriters short 4.5 million shares.

Although underwriters usually do not publicly announce when they are forced to make stabilizing bids, there is strong evidence that they did so in the case of Blue Apron. In the end, the IPO price of the company ended up being $10. On the first day of trading, the stock was hovering around the $10 mark. Without the stabilizing bid, the stock may very well have closed below the IPO price that day, resulting in bad optics for the company as well as the underwriters. However, stabilizing bids have a finite lifespan. The following day, the stock closed at $9.34 and five trading days later it closed at $7.73.