Definition of Broken IPO

What is a "broken IPO"? What is the definition of the term "broken IPO"?

A "broken IPO" is an initial public offering (IPO) that trades under its offering price shortly after going public.

For instance - Facebook just recently priced shares of their initial public offering at $38/share. On the first day of trading, shares of Facebook traded down to the $38 level, but underwriters were able to hold that level by buying a large number of shares.

On the second day of trading, that underwriter support vanished, and the Facebook IPO quickly traded down to around $33/share. This would qualify it as a "broken IPO". This means that anybody who received shares in the offering, or anybody who bought shares on the first day of trading, will be down on their investment.

Underwriters obviously look to avoid "broken IPOs", as they are embarrassing not only for themselves but also for their clients. Underwriters look to price shares at an amount that will guarantee a small "pop" on the first day of trading. On the flip side, they must also be careful that they don't price the shares too high, as else they run the risk of a "broken IPO".

This is the problem that Facebook ran into - shares were priced too high, and the market decided that Facebook's proper valuation was actually in the mid $30s.

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