So Facebook is now a public company but with the shares only one day old the news is already bad: Facebook shares didn’t pull a Google or a Yahoo or a Microsoft or even a TheGlobe.com and soar out of sight on IPO day. They ended right where they started pretty much after the day traders took their easy profits. And while Wall Street sees this performance as a dud, Facebook itself sees it as a masterful piece of financial engineering.
If you are an investment banker — and let me re-emphasize that, if you are an investment banker — you want IPO shares to go up on their first day, rising in price by at least 10 percent though no more than 20 percent. This shows the IPO is hot, the company is booming, yet the offering wasn’t so underpriced that the founders feel cheated. Such IPOs make investors feel happy and happy investors buy and sell more shares and participate in future IPOs.
If you are an IPO company founder and — even more explicitly — you are Facebook CEO Mark Zuckerberg, you want your share price on the first day to go exactly nowhere, which is what Facebook’s did. That means no money was left on the table and the company got the best possible deal. Zuckerberg didn’t and doesn’t care about investors in this scenario, but then neither does he wish them ill. He just doesn’t give a damn.
And there’s the difference because investment bankers do give a damn because they’d like to have another IPO next week or next month and have that go very well, too. Zuckerberg expects Facebook to never issue another share of stock. He’s done raising money thanks, and on his honeymoon.
I’m sure there was a struggle at the end over how to price the offering. The bankers would have preferred $34 or even $32, but Facebook went for $38 and they were correct to do so from their point of view because we now see it was the optimal solution.
Then why don’t we feel better? Because for all its $100+ billion valuation the whole thing feels pretty low rent, like a big sale at K-Mart. Where’s the excitement? There isn’t any.
First
I wouldnt feel too bad for the bankers. Regular IPO fee is 7% of the raise. What did they raise, something like 18 billion? Likely the fee was lower than 7pct. Even at 2 pct that’s a cool quarter billion, just for doing some paperwork and a roadshow. Not bad work if you can get it.
Unless zuck is going to buy something big to fix the mobile issue, I agree, a secondary offering is unlikely.
I read somewhere yesterday that Facebook got them down to 1.1%
Third
for all its $100+ billion valuation
Perfectly pitched to the dot. Facebook got the value out of this IPO, not the “investors” who weren’t in it for the long term!
With only a small part of Facebook on offer, and it’s been considered to feel “pretty low rent, like a big sale at K-Mart.” then I’d say this was a part victory for Bob’s yearly prediction. It didn’t go full IPO, so Bob got this one right (partly).
Trouble is the impact on the market for future IPOs. You may not care about ‘the investors’, but they’re still the primary funding for most companies (they are, not the day-traders, and it is best not to get them confused). They do so to make a profit, like any other. If the IPO doesn’t give them the profit, they don’t have the funds to go and invest elsewhere, so a huge IPO that goes nowhere is going to have a HUGE impact on future IPOs.
There’s a reason several of the underwriting companies got hit HARD on Friday as the Facebook stock kept flatlining – their own performance was measured on Facebook’s stock price. That hit is going to be felt for months to come (note: that means the stock market is going to be level or down well into the election…).
But then again, Wall Street has a very short memory sometimes, so it could all just blow over…
Insider Trading? Not Quite?
So would it be considered insider trading if they used all the information they have on their users’ communications ( including “private” messages ) to determine the initial price to set for their stock? They had plenty of time to ‘listen in’ on their future shareholders plan making….
I’m not surprised at all they were better informed than the bankers to know what the proper price point was!
Hmmm… I bet they know a lot of price points.
I heard on Marketplace that whenever the price dropped to $38 the underwriting banks bought shares to keep the price up (eating into their fee, but keeping the IPO a success).
If that’s the case, the closing $38 may have been manipulated. It will be interesting to see if it drops below $38 next week.
In theory I agree with you.. the purpose of the IPO is to provide cash to the company, not make big profits for the banks. If the manipulation didn’t prevent a big drop, it was perfectly priced.
“the purpose of the IPO is to provide cash to the company” – that depends on whether or not the company needs the cash, and that depends on the debts it already has to earlier investors. It also depends on the attitude of the founders and the earliest employees with their stock options.
If a company is in the black (no investment debt left, or none ever acquired), then the IPO is entirely about making the early employees uber-rich with their stock-options (a-la Microsoft’s IPO). As Bob writes about often (especially in his book), for many it is all about work like hell for five years, then sell out.
IPOs stopped being about cash for the company to expand decades ago. Today it is solely about making the investment pay off (the cash spent by early investors and underwriters, and the time spent by the early employees). The company pulls in private investment to expand, then the IPO gives the profits to that expansion once it is shown to be on a successful direction. By this common standard, Facebook’s IPO was probably 2 years too late, as aside from increasing commercial interest in social networking for advertising, there isn’t much room to expand, and plenty of space to contract.
The value of the company comes to $20 per user, approximately. There are 7B people, and 800M users. Most of the planet is impoverished, so the company cannot grow much more in terms of users. The negative news on one founder renouncing citizenship is alienating users as are some privacy policies.
Facebook has nowhere to go but down. I have a bridge to sell, so if you think FB is a good value you will love my deal.
The share price is overvalued, and people who didn’t perform due diligence are going to find out why lemmings jump off cliffs. Herd mentality. This herd is going to be thinned out real soon.
While I don’t think Facebook is a company for the ages and have explained why in previous columns, I think in the near term the company will do just fine as I explained on Friday. They have ways to goose earnings despite the mobile issue and will do so. Two years from now I might agree with you completely, however. More on that later today…
FaceBook is a profitable company and will probably become more profitable. That’s not the issue. The issue is are they valued correctly.
Are they worth $20 per user. Is a company with $1B in annual profits worth $16B? When you calculate current share price and outstanding shares that is how the public values the company.
Do the math.
My gut agrees with you, probably because I regard FB with disdain (don’t want the product), when I should probably respect them for monetising naive people.
However, I suspect the price with oscillate upward for the next 2 years (notwithstanding a post-IPO dip in the next qtr) as they continue to release real time, trend, and aggregate population data that gov wants to buy. Forget advertising – gov will protect the privacy violations because they want the data.
Shit, they’ve not even got into election prediction yet…
They dipped their toes in a few months ago. http://allthingsd.com/20120112/facebook-gives-politico-deep-access-to-users-political-sentiments/
Yep. Them boys got taken. Zuckerpunched, I’d say.
As noted above, unless FB (a) radically expands its subscriber count — unlikely — or (b) figures out a magical way to garner more than than $4/subscriber/year to cover the $16 difference, this turkey is headed for $6/share.
So, what new revenue stream will FB create?
Political data? That’s an unsteady revenue stream.
Product rankings? Pretty sure Amazon and Google have that under control. Ditto for jobs, apartments, etc.
Targeted ads? GM pulled out (GM also pull out of the Superbowl — says more about GM than FB).
Creepy dating/hookup/match-making? That’s back to FB’s roots (“Looks like your date with Tanya went well. You might want to try Smitty or Jewel.”)
Gift sell-throughs? “Your date with Tanya went well. Send her roses for her piano, only $19.95 + delivery.”
Could be interesting.