Facebook IPO Not a Flop
Is the Facebook IPO a flop? Not on your life. It’s a sign that Silicon Valley has gotten as smart about finance as it has been about technology. I like it. 
The smackdown of Facebook comes from the lack of a price pop on the first day of trading, compounded by declines in the company’s stock price in succeeding days. This is not a flop from Facebook’s perspective, it’s a success.
(A separate issue is NASDAQ order execution, which I’m not discussing here.)
What’s bad is not Facebook’s initial public offering, but the old Initial Public Offering model: the stock is sold at some price, let’s say $20. On the first day it jumps to, say, $35. Further upward movement follows on succeeding days, leaving the stock price at $40 a week after the IPO. What’s bad is that the company sold stock for $20 that it could have sold for $40, or at least $35. It’s a violation of fiduciary duty for the officers and directors to knowingly participate in such a scheme, though usually everyone is so happy to have the IPO completed, and to be so rich, that they don’t really care too much.
A company is not helped by the “pop” on the first day of trading, but others are greatly benefited. Those investors who got in at $20 and could get out the next day at $35 were obviously better off. How do you get to be such an investor? You do business with the investment house that underwrote the deal. The sad part of the story is that the corporation going public pays the underwriter a fee that’s usually seven percent of the proceeds for small issues and averages 3 ½ percent for large issues. Imagine paying a fee for the underwriter to favor its investment clients over the company going public. (The Facebook underwriting fee was reported to be 1.1 percent of the money raised.)
Here’s what good about the Facebook deal: the company worked for its own best interest and was not intimidated into favoring the investment banks. It negotiated a low fee and pushed for as high a price as the market would bear. Was it a flop? Not for Facebook. This is one deal to like.
Comments
Your generation makes me sick. Some people got rich, so this was not a bad thing? What a sham. Tell me, who do you think it was that pushed that price up to 46.00? Facebook will go the same way as yahoo, it was never a good investment. And here you are patting facebook on the back for pretty much stealing peoples’ money with the help of Morgan Stanley. *middle finger*
Very good points. Have also been wondering why Facebook IPO was considered a flop. Just because it did not get some artificial jump on the first day does not mean that the IPO was a flop. The bigger issue is simply the valuation of FB – at a 50 billion valuation its got some nice upside, but 104 billion was way out of line.
The Float was way too big for the IPO. A Good IPO has a limited number of shares. Its almost like Facebook did the IPO to raise money rather than increase the value of the company. If it goes above $50 it might be a good buy, but I wouldn’t touch it until then.
Leaving aside two specific issues (trading failure by NASDAQ, and allegations of failing to disclose potentially lower projections by the underwriter) –
Kudos and I agree with most of Bill’s comments, but not all. I agree it’s a crock that ‘successful’ IPO’s are defined by stock prices that jump on the first day. That’s a pattern that enriches investment banks (their trading books) and their favored clients, at the expense of existing shareholders and new shareholders that buy high.
However, the Facebook pattern (IPO high, close low) is a failure as well. IPO’s that work through an auction process or other non-proctored (shall we say) methods should result in a fairer price and reduce IB fees and profits. A success pattern would be a stock that opens and closes at roughly the same value, whose price then rises/falls based on fundamentals.