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.
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Filed Under: ipo, market price
Companies: facebook
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Priced right, eh. For whom?
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A loss
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Anyway, that's a lot of reasons to go public.
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A whole heap of PITA regulations to pass off onto the guys they let run the company after they go public. Oh, that and a heap of cash for the options they grant themselves.
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Re: A loss
The “Facebook Problem,” Secondary Market Trading and the 500 Shareholder Rule: Part 2 of a 4-Part Series on the Jobs Act -peHUB: Sooner or later, Facebook would exceed 500 shareholders of record and be required to register with the SEC.
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Access to public capital markets: that is, easier access to money for investment.
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This IPO allows the investors to sell some of their shares and make some/a lot of money. Usually an IPO is a means for the company to raise capital to expand their operations, but I don't think that really applies to Facebook; they don't really need the money except to buy out innovative start ups.
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Re: A loss
And I have to disagree with this article: it's all very well Facebook's founders and early investors earning $100b for building, growing and supporting the site, but it's frankly terrible that those who bought shares today weren't able to cream off another $100b after a day's hard trading. Next you'll be suggesting that pay should be linked to performance.
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it IS a disaster...
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Re: it IS a disaster...
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Congrats Zuck!
Investors to realize social media is shallow, insubstantial and extremely prone to FotM syndrome (flavor of the month) in 3... 2... 1....
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Is dotcom crash 2 coming?
This current market has struck me as unsustainable because world economic conditions give me no reason to think boom times are in our immediate future. If Facebook's stock doesn't do well, this might be the beginning of dotcom crash 2. The people most impacted will be VCs and startups. If there is no obvious exit strategy and companies are expected to be profitable to keep going, that could decrease all the media hype about so many of them. Then maybe we can focus on some really needed companies rather than the next social media startup.
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Many of the hyped companies, even if profitable, won't turn out to be good investments, or at least based on the valuations given them. We've got more social media companies than the universe can support, so a lot of them will fail. That's not a problem at all for those who are used to losing money on risky investments. But hopefully it will keep out people who can't take on those risks.
What the world really needs is more scientific innovation to solve some of mankind's major problems. Those don't lend themselves the kinds of investments VCs like to do, but if the me-too companies turn out to be bad investments, maybe we'll start looking for better ways to place capital.
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Facebook will continue to exist for a long time. We still have AOL. And MySpace is still with us.
I'm not saying Facebook will disappear. What I am saying is that if it doesn't make new investors money, it will tend to sour lots of people in buying shares in social media companies, which I don't necessarily think is a bad thing.
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No, it didn't. The bubble and the crash were related to the stock market. The values of the stocks rose and then fell. But that didn't cause the companies to fold. The companies folded because they ran out of money, not because their stock, which had already been issued, declined in value.
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Pandora: down 7.13%
LinkedIn: down 5.65%
Quepasa: down 21.74%
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Erm, wouldn't their ability to raise capital have been affected by the market value? If their share prices didn't collapse, they would have been able to acquire funding to continue, surely?
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The price of a stock is relative, kind of like being poor.
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Re: Is dotcom crash 2 coming?
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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Facebook IPO too much too late
Their advertising model isn't working and advertisers are already withdrawing. They only manage to make $5 per person per year. The hype bubble is already at its maxim, only one way to go. Some people are going to get very burned in the long run.
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Re: Facebook IPO too much too late
that depends on the advertisers, some are withdrawing, others are joining.
GM withdrew, Ford said they'll stay.
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This article says what should have been said before and by many.
Facebook’s biggest problem is that it’s a media company — Tech News and Analysis
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The only healthy sales model is when a user specifically searches for an item they want, this is why google is going all out to improve their search tools. Facebook has none of this and many many people use adblockers. My point is that there is no real or new revenue source in their current business model that would justify any major increase in their profits, which are rather paltry given the size and value of the float.
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But like I said, for the time being, I don't see them going anywhere.
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It was a failed charade
http://en.wikipedia.org/wiki/Greenshoe#Risk_to_Investors
The SEC currently does not require that underwriters publicly report
their short positions nor short-covering transactions. Investors who
are unwary of underwriter stabilizing activity who choose to invest in
what they perceive to be a stable issue can encounter volatility
when the underwriters pause or complete any stabilizing activity.
"Cast in the most negative light, price stabilization might be seen
as a means of transferring risk to a relatively naïve segment of
the investor population."
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Why Facebook's IPO Valuation is Insane
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Which camp FB is in, I'm not too sure. I *am* sure that its p/e ratios paint a very dim picture and growth predicated on blue sky forecasts rarely comes through. I'm not usually schadenfreudish (sp?) but I'm actually looking forward to a collapse here. Then maybe people will understand (hah! as if!) that a company with no real plan is not a good investment at any price above a penny.
I could be wrong but I don't think so :-)
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Irony
Curses! Apparently the channel, in the interests of promoting civilized and non-confrontational discussion on the site, will only allow you to comment if you login to their site with your Facebook account. According to their FAQ if you don't already have a Facebook account, it's very easy to set one up, and if you are ideologically opposed to the idea of commenting via a Facebook account, well, tough shit for you, because ... courtesy, etc., you're not welcome to enter the discussion.
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P/E Ratio
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Facebook Flops: Look Out Below!
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Wrong again, 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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Re: Wrong again, Mikey
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But as the unpopular AC sort of implied, that won't happen again. The banks will low ball the next IPO, so they can go back to shafting the startups as God intended them to do. Those yachts don't pay for themselves.
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