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.