May 19 (Bloomberg) -- Morgan Stanley, the lead underwriter in Facebook Inc.’s initial public offering, stands to take a hit from a stock market debut that stoked disappointment among investors in the largest social network.

The bank stepped in to prop up the stock from dipping below its $38 IPO price yesterday, said people with knowledge of the matter, who asked not to be identified because the purchases were private. Morgan Stanley, based in New York, was the only underwriter among Facebook’s 33 banks with the responsibility to support the shares, the people said.

Underwriters “are acting like the cavalry to keep this thing going up,” Eric Jackson, founder of Ironfire Capital LLC, said in an interview on Bloomberg Television’s “Street Smart.” “They’re not going to be here a week from now, two weeks from now, a few months from now. It does suggest that there are going to be some rocky waters ahead.”

Days before the sale, Facebook and Morgan Stanley decided to bump the offering price range to one with $36 as a midpoint to persuade the company’s backers to sell more of their stock, one of the people said. Facebook and the bankers knew pre-IPO investors were willing to sell more, though not at the initial midpoint range of $31.50 a share, the person said. Goldman Sachs Group Inc. and Accel Partners were among backers that decided to sell additional shares in the IPO.

The IPO price, at the top of the increased range, prevented a first-day pop in the shares, which advanced 23 cents to $38.23 yesterday.

“It does indicate that investors are conscious of the risk, that the revenue model is still unproven, that operating costs are high and rising,” said Brian Wieser, an analyst at Pivotal Research Group LLC with a $30 price target on Facebook. “Those factors are weighing on the investors. The stock is greatly overvalued.”

Crossed Quotes

The debut was also marred by glitches at the Nasdaq Stock Market, where initial pricing of the first transaction was pushed back by a half-hour amid delays in trade confirmations, crossed quotes and signs that orders were mishandled.

Facebook executives and bankers met on May 17 to discuss the final IPO price, people familiar with the matter said. Among the underwriters, Morgan Stanley was the main bank handling pricing, the people said. Some co-managers of the offering advised Morgan Stanley against expanding the sale and price range because their clients’ demand didn’t support the move, two people said.

Pen Pendleton, a spokesman for Morgan Stanley, declined to comment. Jonathan Thaw, a spokesman for Menlo Park-based Facebook, declined to comment.

Market Value

Facebook raised $16 billion in the IPO selling 421.2 million shares on May 17, valuing the company at $104.2 billion. The offering price gave Facebook a market capitalization almost double the $60 billion United Parcel Service Inc., previously the biggest company to complete an IPO, was valued at when it went public in 1999, according to data compiled by Bloomberg and Dealogic.

That means Facebook bankers will split about $176 million for managing the social-networking company’s initial public offering after accepting a lower-than-average fee of about 1.1 percent. The biggest share of IPO fees typically goes to the lead underwriter on the deal, though the cost of propping up the stock in the first day of trading could potentially outweigh any underwriting fees generated from the sale.

Key Bankers

Dan Simkowitz, Morgan Stanley’s chairman of global capital markets, was one of the main bankers on the offering, said a person familiar with the matter. He also helped run General Motors Co.’s 2010 IPO that raised $18.1 billion.

Michael Grimes, global co-head of technology investment banking at Morgan Stanley, also played a key role. He introduced Facebook executives to investors at a lunch meeting last week in Palo Alto, California, part of a road show to pitch the deal to prospective buyers. Grimes became acquainted with Facebook Chief Operating Officer Sheryl Sandberg when he handled the IPO for Google Inc., her former employer. He meets regularly with investors in search of the next promising startup and is an avid consumer of his clients’ products.

Sandberg recused herself from picking bankers for Facebook’s IPO because she had relationships with several banks from her previous job at Google, one person said.

Facebook Chief Financial Officer David Ebersman was the point person on the deal, starting with the selection of the lead bankers, one person said. Sandberg and Chief Executive Officer Mark Zuckerberg were involved in major decisions throughout the process, the person said.

The performance may hurt the entire IPO market in the short term, people said. Some technology companies considering initial offerings are readjusting timing and valuations based on the day’s events, one of the people said.

“I know a bubble when I see one,” Bill Gross, Pacific Investment Management Co.’s co-chief investment officer, wrote about Facebook in a posting on Twitter.

--With assistance from Ari Levy, Brian Womack and Douglas Macmillan in San Francisco, and Sarah Frier and Michael J. Moore in New York. Editors: Jennifer Sondag, Tom Giles

To contact the reporters on this story: Serena Saitto in New York at ssaitto@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net