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) when the price of the newly issued shares falters or is shaky in trading.
Stabilizing Bid Explained
After a company has made a decision to go public, it will vet a number of underwriters for expertise in valuing the company's equity, marketing and distribution, sell-side research support, and trading functions. The trading capability is where the stabilization bid is relevant to the issuer, which will be interested in getting off on the right foot as a public company. When the IPO price is set, and the issuer's shares make their debut in the public, the issuer wants the shares to be well-received, meaning a firm or higher stock price upon release into the market.
The risk of negative perception of the company is high should the trading price fall below the IPO price. To prepare for this risk, the issuer grants the underwriters a greenshoe option, otherwise known as an overallotment option, that allows the underwriters to oversell or short up to 15% more shares than initially offered by the company. If demand does, in fact, begin to look weak and the price wavers out of the gate, the underwriters will step in with a stabilizing bid by buying back the shorted shares. This demand source from the underwriters for the newly-issued shares will help to shore up, or stabilize, the stock 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, so there was a clear indication 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, leaving the underwriters short 4.5 million shares. Although underwriters will not publicly state that they were forced to make stabilizing bids, there was strong evidence that they did so in the case of Blue Apron on the first day of trading because the stock was struggling around the $10 mark. Without the stabilizing bid, the stock may very well have closed below the IPO price that day. That would have been bad optics for the company as well as underwriters. However, stabilizing bids have a finite lifespan. The next day the stock closed at $9.34 and five trading days later it ended at $7.73.