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.

Filed Under: ipo, market price
Companies: facebook

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  1. icon
    Suzanne Lainson (profile), 19 May 2012 @ 10:57am

    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.

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