Facebook Trading Near Its IPO Price Means It Was Priced Right, Not That It Was A Disaster

from the come-on-people dept

You may have heard about a little IPO for some random tech company today. Something to do with books and faces. While we didn’t plan to talk about it much (because it’s getting covered to death everywhere else), we did want to comment on one thing that we’ve discussed for many, many years (going all the way back to 1999 and the first month we published in blog format). IPOs that have a big “pop” on the first day are often hyped up in the press as having a “good” IPO. And, the fact that Facebook spent the first few hours after opening trading right around its IPO price is being described in the press as if it was a bad thing:

“It’s a total disaster because the stock is trading right at the IPO price,” said Francis Gaskins, editor of IPOdesktop.com in Marina del Rey. “They didn’t want that in a million years.”

I guess this depends on who the “they” is in that latter sentence, but if we were dealing with a rational world, having the trades be right around the IPO price is actually a good thing, which suggests that the underwriters properly priced the IPO to what the market price is. Having a massive pop means that the company actually left money on the table — often a lot of it.

In case you’re unfamiliar with how IPOs work, basically what happens is the underwriters “buy” all the equity that’s going on the market from the company, and then put it on the open market. So, that IPO price shows exactly how much Facebook gets. All of the trading after that is between other entities. So, for example, with Facebook, it got $38 per share last night from the underwriters. If, today, the stock had been trading at (just for example’s sake) $80, it would have meant that Facebook effectively sold its shares for half price on what the market would bear. That would be more of a disaster, because it would suggest that Facebook missed out on a lot of money.

Of course, the banks often like to underprice things a bit, because that creates more buzz and more trades (and they can get more money that way too). But, from Facebook’s standpoint, it should be happy that the trading remains around the opening price. Of course, going forward, the company should want the stock price to go up, because that means when it taps back into the market it can get more for whatever equity it sells. But an initial day pop, for all the hype and press it generates, is not something that should be celebrated. It shows that a company got shafted.

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Companies: facebook

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Comments on “Facebook Trading Near Its IPO Price Means It Was Priced Right, Not That It Was A Disaster”

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72 Comments
Anonymous Coward says:

Re: Re: Re:

You are the only person that knows what they are talking about. It was artificially kept above the IPO price today by the underwriters to avoid the first day embarrassment. Next week the underwriters will dump what they have on hand to recoup their money. This POS is going down next week. Watch and learn kiddies.

Ben (profile) says:

Re: Re: A loss

Facebook certainly didn’t get $104 billion. The owners of owners of the preferred stock did, divided however it is divided. Facebook itself has shares which, iirc is now valued at around $18b; that is expected to be used to provide stock grants to employees and the like, along with being a reserve to raise capital.

Suzanne Lainson (profile) says:

Re: A loss

The private trading of Facebook shares reached a point where the company had to register with the SEC. Since it was going to have to start sharing business info anyway, they decided they might as well do an IPO and collect some extra money.

The ?Facebook Problem,? Secondary Market Trading and the 500 Shareholder Rule: Part 2 of a 4-Part Series on the Jobs Act -peHUB: Sooner or later, Facebook would exceed 500 shareholders of record and be required to register with the SEC.

Ben (profile) says:

Re: A loss

People/companies invested in Facebook to provide the capital they needed to really get started. They invested for a percentage of the company with the expectation that the company would someday go public and allow them a chance to recoup their investment (and then some).

This IPO allows the investors to sell some of their shares and make some/a lot of money. Usually an IPO is a means for the company to raise capital to expand their operations, but I don’t think that really applies to Facebook; they don’t really need the money except to buy out innovative start ups.

Andrew (profile) says:

Re: A loss

Someone on Twitter suggested that they didn’t really want to go public; it’s just that they couldn’t figure out the privacy settings either.

And I have to disagree with this article: it’s all very well Facebook’s founders and early investors earning $100b for building, growing and supporting the site, but it’s frankly terrible that those who bought shares today weren’t able to cream off another $100b after a day’s hard trading. Next you’ll be suggesting that pay should be linked to performance.

Suzanne Lainson (profile) says:

Is dotcom crash 2 coming?

I was writing about tech companies during the dotcom boom and bust. We didn’t actually know the market had hit its peak until it never hit it again. So the bust wasn’t completely recognizable until looking back. Once average investors realized they probably weren’t going to make money in the market, they stopped investing, and some of them got nervous and pulled out.

This current market has struck me as unsustainable because world economic conditions give me no reason to think boom times are in our immediate future. If Facebook’s stock doesn’t do well, this might be the beginning of dotcom crash 2. The people most impacted will be VCs and startups. If there is no obvious exit strategy and companies are expected to be profitable to keep going, that could decrease all the media hype about so many of them. Then maybe we can focus on some really needed companies rather than the next social media startup.

Suzanne Lainson (profile) says:

Re: Re: Is dotcom crash 2 coming?

I doubt it. This isn’t the 1.0 internet. The sheer number of people on-line now, and using social media makes such doomsday prophecy, unlikely at best. Facebook isn’t pets.com.

Many of the hyped companies, even if profitable, won’t turn out to be good investments, or at least based on the valuations given them. We’ve got more social media companies than the universe can support, so a lot of them will fail. That’s not a problem at all for those who are used to losing money on risky investments. But hopefully it will keep out people who can’t take on those risks.

What the world really needs is more scientific innovation to solve some of mankind’s major problems. Those don’t lend themselves the kinds of investments VCs like to do, but if the me-too companies turn out to be bad investments, maybe we’ll start looking for better ways to place capital.

Suzanne Lainson (profile) says:

Re: Re: Re:2 Is dotcom crash 2 coming?

I agree with you, but I think you underestimate the number of active users facebook has. Now, I’m not saying facebook is always going to be this popular, at some point the next big social site will replace it, but not currently.

Facebook will continue to exist for a long time. We still have AOL. And MySpace is still with us.

I’m not saying Facebook will disappear. What I am saying is that if it doesn’t make new investors money, it will tend to sour lots of people in buying shares in social media companies, which I don’t necessarily think is a bad thing.

Suzanne Lainson (profile) says:

Re: Re: Re:4 Is dotcom crash 2 coming?

The dotcom bubble did cause many sites to disappear.

No, it didn’t. The bubble and the crash were related to the stock market. The values of the stocks rose and then fell. But that didn’t cause the companies to fold. The companies folded because they ran out of money, not because their stock, which had already been issued, declined in value.

PaulT (profile) says:

Re: Re: Re:5 Is dotcom crash 2 coming?

“he companies folded because they ran out of money, not because their stock, which had already been issued, declined in value.”

Erm, wouldn’t their ability to raise capital have been affected by the market value? If their share prices didn’t collapse, they would have been able to acquire funding to continue, surely?

Anonymous Coward says:

Re: Re: Re:6 Is dotcom crash 2 coming?

Share price does not matter. If the company was a good investment, had a viable business plan, and had a use for the cash they would raise, then they could still access the public markets. They would be doing so with monopoly money that was worth less than it was before the decline, but they could still raise capital. However, if the stock price reduction is due to a non-viable venture, of course they would find it difficult to sell additional shares, which could lead to them failing due to lack of funds supporting a failing business.

The price of a stock is relative, kind of like being poor.

Suzanne Lainson (profile) says:

Re: Is dotcom crash 2 coming?

There are two different phenomena to keep in mind:

1. Investor mentality.
2. Viable businesses.

The dotcom crash wiped out enough investor portfolios that many of those people have never gotten back into the market. And it looks like some of them didn’t bite with the Facebook offer, either. People aren’t buying it like crazy, so caution still appears to be the watchword. Anyone else hoping to do an IPO may be thinking twice about it now.

But companies that look sound and are efficiently run may not need to do an IPO anyway. They can get their funding from private investors, crowdfunding projects, maybe some grants, and maybe loans.

What happens in the stock market does not necessarily keep the worthy companies from getting money. What it does do is discourage backing of companies where the only purpose is to take it public and not worry about it after the initial investors and the investment bankers take their share. If “dumb” investors catch on that the bubble is really just them being scammed, the bubble bursts, and caution happens again.

The ripple effect of Facebook’s meh IPO already seems to be happening. In my mind, that’s good. It means maybe there aren’t a lot of “greater fools” to be exploited. That means that VCs might look more carefully at what they are throwing money at.

I like all the tech incubators that have popped up. Yes, let’s have lots of creative types seeing if they can create good companies. But that doesn’t mean most of those companies are worth or are going to need to go to the IPO stage. And if there isn’t a lot of support at the IPO stage, the initial investors will think twice before counting on that as their exit strategy.

I’m not sure if all that is clear to some of you, but the fact that Facebook isn’t going to fold right away doesn’t, therefore, mean that we won’t see a dotcom 2 crash. Social media companies will keep chugging along. Most will fail, and a few will survive, and hopefully investment money will look for other areas than just social media.

Aileron says:

Facebook IPO too much too late

Can’t see how a company that is already at its peak with only a spurious shot at a very reluctant China left in its sights can gain value for its shareholders unless they diversify like google and buy into other businesses.

Their advertising model isn’t working and advertisers are already withdrawing. They only manage to make $5 per person per year. The hype bubble is already at its maxim, only one way to go. Some people are going to get very burned in the long run.

Suzanne Lainson (profile) says:

Re: Re: Facebook IPO too much too late

I’m the camp that agrees Facebook is not a good place to advertise. Many people (including me) will not click on any Facebook ads because we don’t trust Facebook. And the more Facebook tries to collect info on us to sell to advertisers, the less we trust it.

This article says what should have been said before and by many.

Facebook?s biggest problem is that it?s a media company ? Tech News and Analysis

Aileron says:

Re: Re: Facebook IPO too much too late

Yes, I agree, I’m sure many will stay, even on the basis of brand recognition rather than just useless clicks like google, but most marketers know that in the end its bang for your buck that counts, sales do matter for money spent. Even google advertising is far less effective as people turn off to ads in general.

The only healthy sales model is when a user specifically searches for an item they want, this is why google is going all out to improve their search tools. Facebook has none of this and many many people use adblockers. My point is that there is no real or new revenue source in their current business model that would justify any major increase in their profits, which are rather paltry given the size and value of the float.

Alecco says:

It was a failed charade

The joke today: FB has to re-IPO because all the stock is back again in the hands of the bankers

http://en.wikipedia.org/wiki/Greenshoe#Risk_to_Investors

The SEC currently does not require that underwriters publicly report
their short positions nor short-covering transactions. Investors who
are unwary of underwriter stabilizing activity who choose to invest in
what they perceive to be a stable issue can encounter volatility
when the underwriters pause or complete any stabilizing activity.
“Cast in the most negative light, price stabilization might be seen
as a means of transferring risk to a relatively na?ve segment of
the investor population.”

JustSomeGuy says:

Most people expect to make a stag profit from IPOs on the first day of trading. The real dogs will plummet immediately, those dogs with support (usually from the u/writers) will last a couple of days at most, the intent being to try and convince Joe Public that it’s a fair price and hopefully get them buying to a level of self-sustainability. The non-dogs, even if they drop a bit, will recover within weeks.

Which camp FB is in, I’m not too sure. I *am* sure that its p/e ratios paint a very dim picture and growth predicated on blue sky forecasts rarely comes through. I’m not usually schadenfreudish (sp?) but I’m actually looking forward to a collapse here. Then maybe people will understand (hah! as if!) that a company with no real plan is not a good investment at any price above a penny.

I could be wrong but I don’t think so 🙂

Robin says:

Irony

One of our local (Denver) TV news channels had an appallingly stupid excerpt on how ‘disappointing’ it all was, no one made any money apparently, various talking heads appeared to trash FB, its inability to convert membership into cash… on and on, and not a mention of the points made here. So I thought I might suggest on the news channel website that for an alternative perspective people read this post…

Curses! Apparently the channel, in the interests of promoting civilized and non-confrontational discussion on the site, will only allow you to comment if you login to their site with your Facebook account. According to their FAQ if you don’t already have a Facebook account, it’s very easy to set one up, and if you are ideologically opposed to the idea of commenting via a Facebook account, well, tough shit for you, because … courtesy, etc., you’re not welcome to enter the discussion.

Anonymous Coward says:

At 100 times earnings, this is just not a good investment at all. Valued in normal terms, this stock is about 8 to 10 times too high, a huge risk. Without some magically increase in revenue, this stock is almost certainly doomed to slowly slide down to something closer to $10, as people start to value it based on the reality of the business, and not the flash in the pan “internet” thing that it really is.

Anonymous Coward says:

At 100 times earnings, this is just not a good investment at all. Valued in normal terms, this stock is about 8 to 10 times too high, a huge risk. Without some magically increase in revenue, this stock is almost certainly doomed to slowly slide down to something closer to $10, as people start to value it based on the reality of the business, and not the flash in the pan “internet” thing that it really is.

Anonymous Coward (profile) says:

Wrong again, Mikey

Hi Mikey,

It’s your friend Anonymous. The one who writes in every time you say something dumb, especially about patents and patent policy. Anyway, as a dog returns to its own vomit, your post has brought me here to the comments section.

As a number of posters have already pointed out, the only reason that FB didn’t close down was because the syndicate supported FB at the opening price. There are some obvious reasons that’s bad — as an exercise, I’ll let you work those out for yourself. I think you’re capable of that. Let me take some time to explain some of the not so obvious reasons.

In case you hadn’t noticed, the market’s in a downtrend that shows no sign of reversal. The easiest way to stop that would have been to suck in retail “investors” who don’t know (or care) about Euro-zone politics, China’s leveraged and slowing economy, etc. The easiest way to do that would have been to open FB at a reasonable price per share, with a reasonable float size, and then let the shares pop by 50% and make headlines everywhere around the world. Sure, it would have screwed FB out of money, but it would have insured that the syndicate members would have made even more money, and since when do investment bankers watch out for the interests of their clients?

Instead, we had double the float at double the price, and solid proof that there’s no new money entering the market. All of the other companies in the sector sold off, maybe because the FB offering sucked wind, but more likely because the buyers didn’t have any spare cash lying around and had to take profits in order to make the new investment.

So now FB will close down on Monday, or whenever the syndicate stops supporting the price. And all of the social media startups that have been justifying their price based on FB’s $100b market cap are going to ratchet lower, etc. And the market will continue its sell off as the institutional sellers continue to de-riskify.

So, in closing, the FB IPO trading near its opening price does qualify as a disaster.

xoxo, Anonymous

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