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. identicon
    Anonymous, 19 May 2012 @ 3:47pm

    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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