The Facebook IPO Went Fine
I think I'm the only professional saying that the Facebook IPO was okay. I don't say that because there weren't problems. There were. I say that because the IPO did what it was supposed to do.
IPOs are designed to give the offering company capital. Usually, they want the money to finance an expansion of their products and services. While companies which are profitable do have money to expand, sometimes the cash (and/or access to debt) they have isn't enough for their plans. Then they have to decide whether the amount of money their plans require justify the loss of control and the additional scrutiny that come with being a public firm.
When companies "go public", the money that investors pay for their stock goes to the company. I know that probably sounds simplistic. But I was sitting on a plane recently when I overheard someone asking a banker where all that money "went". Facebook offered, people bought, and there's a case to be made that Facebook made the maximum amount of money they could have. That's good for Facebook. It's good in a way even IF investors "lost" some money since then. Investors surely hope FB will be smart with the money.
Regarding the offering, YES, their exchange, NASDAQ, had some problems. And yes, the stock price has gone down since the offering. People have "lost money" (actually, if they haven't sold, then they haven't lost anything yet). And, having your investors lose money isn't good. One could - and many have - argue that the initial price was too high. But the choice to buy was each investor's. It's reasonable to assume that these were adults, and they bought because they thought the company was worth more than the price suggested (meaning the stock would go up in the future).
But there's also a belief among a lot of people that buying IPO stock is a way to make a lot of money fast. When THAT happens, the IPO ceases to be about the company's need for cash. If a company's stock price goes WAY up on the offering day, the investors make money at the expense of the capital needs of the firm.
Yes, you could argue that it's more complicated than that. I encourage you to do so below. But there are a lot of things in professional life that one can make incredibly complicated. When we're doing so, let's not make it so complicated that we forget what the most important thing is.
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Fine for some, not for others
Hey Mark, I'm glad someone is finally saying it. The IPO itself was indeed a major success for what it was meant to do - raise capital for the firm. I believe this also took place at the expense of investors who had wool pulled over their eyes.
Main street investors didn't get access to the same word of mouth analysis and forecasts about Facebook's estimated value. You could argue that, because of this, such investors paid more than it was really worth. That's where I take issue with the IPO and argue that it did not go fine.
Regardless, I was not one of those investors since FB didn't pass my gut check of "what, are you serious? 100 times earnings for a business model with falling advertising margins?"
FB IPO marginal success.
IMHO the FB IPO wasn't successful for a number of reasons.
One dimensionally, FB got their capital; this was a marginal success. 1000 FB millionaires potentially provide a new crop of angel investors for Si Valley.
But an IPO is not just about that 'capitalization' event, it also reflects a formal private -> public company transition, and the responsibilities there in. True Nasdaq and HFT mangled the IPO process, with Bid/Ask prices inverted for nearly 2 hours and trading blocked to non HFT speculators/investors. the private secondary market and IBs improperly priced the IPO. FB fundamentals with regard to monetizing mobile and it's general valuation relative to revenue are absurd.
FB has done an excellent job on creative destruction when approaches or technologies don't work. they have a portfolio of many excellent technologies. Technologies are impressive when they can be applied in ways that create shareholder value.. Running a public business is vastly more complex than creating cool technologies..
and the pricing issue, mobile presentation layer problems and the pending unlock event in 150 days are certain to create forward going downward pressure on the stock price.
http://www.ritholtz.com/blog/2012/06/unfriended-the-facebook-ipo-debacle...
IPOs aren't supposed to go like this and after 1 month of trading, at a 30% discount below IPO price can't be considered a successful IPO event, for investors, the IPO market, the IBs, the exchanges or fledgling startups.
Thank you Mark
Mark and Team: Thank you for the new blog.
Will this blog have it's own RSS feed?
Look forward to following.
Mike
7155
This looks like a great
This looks like a great addition to the MT stable.
And I also echo Mike's question about an RSS feed
Rss Feed
Hi everyone
the RSS feed is: http://www.manager-tools.com/the-effective-manager/rss2
Wendii
Capital for what?
I agree that investors are adults who invest at their own risk. There were many red flags indicating overvaluation, but adults still chose to buy based, in my opinion, on hype. We'll see how it plays out in the long run.
Assuming your premise is correct in that the purpose of the IPO was to raise capital, why does FB need more capital? Do they have some new service under development that hasn't yet been announced? The only new "service" I've head coming from FB-land is that they're tying to target children as a new audience, and this will obviously face opposition on many levels.
I again ask, why does FB need more capital? For more pet projects like buying, arguably without board oversight, an unproven company like Instagram for a large lump sum of money? I agree, the IPO was a success in that it raised capital. I disagree, though, that FB needed capital, as I see no indications that they have a valid plan of growth that requires the capital infusion generated by the largest IPO ever.
I also think Mr. Zuckerberg will shortly become intimately familiar with the term "piercing the corporate veil", and I bet he won't like it.
It's my opinion, and thanks for yours,
Robert Hernandez
Two things
I didn't buy into FB as I considered it way too overpriced and reminiscent of the dot com bubble of the '90s, so I haven't followed the story too closely.
However, there are two questions I picked up in passing about this IPO that concern me. I'd love to see some comments on them.
1) Was there full disclosure? The future revenue forecasts presented in the prospectus is said to have been out of date by the time of the launch, there having been a downward adjustment. This should have been declared prior to the IPO launch and I believe that prices took a tumble immediately following this assertion. Evidence of a lack of transparency or inadequate governance are both red flags to the long term viability of a firm and the market does apply a discount to evidence of lackings on this front.
2) On the question of "Where did all that money go". You say Mike that it went to the company, in other words to the cash balances or short term liquidity investments held by FB at the Bank - pending future investments. I also hear however that many of the previously private shareholders of FB are now a lot richer, and someone above mention that they may provide a source of business angels going forward. But how much of the IPO was the sale of existing, privately held stock of Zuckerberg and co, and how much was new issuance of shares providing the company with fresh capital and bolstering their cash balances? Private shareholders offloading shares when on a high is not a good sign for less knowledgable "populist" investors!
Keep up the good work!
It's more complicated than that...
In a short term perspective, the IPO was successful. It raised capital for the company, and did so more cheaply than raising capital from the debt market. This is considered a win in my book. An IPO is meant to raise capital for the company, this much is true. It is also a good way for current owners to cash out (to answer ASM1105, about 240M shares sold in the IPO were held by private owners).
The IPO has longer term consequences though, so a longer term perspective may shine some light on whether or not the IPO was "successful". An IPO isn't only about raising capital for the company and its exiting owners though. It also has other impacts. For example, it is rumored the FB IPO has hurt the future IPOs of other companies. If this is true, those companies will not be able to raise the capital that they need. While unexpected market forces are common, it’s still bad to see other unrelated companies hurt.
Furthermore, from Facebook's perspective, a bad reputation caused from this IPO could cause their stock to be undervalued. An undervalued stock could potentially hurt Facebook to acquire other companies with all stock offers.
And herein lies the problem with a long term perspective...the IPO was a month ago. We won't know the consequences for many years to come. If we use an uncomplicated metric, the IPO was successful. If we want to use a complicated metric, we'll have to wait and see before we can pass judgement on this IPO.
Afterthought
JoeB83 and I seem to agree - in terms of the short term objectives of the exercise, it did the job it was meant to. Raised capital for the company and allowed some investors to exit, at least partly.
JoeB83 correctly says that if an IPO like this doesn't perform well after an issue, then from a long term perspective, this is a really poor IPO and has been exceptionally badly managed !! This kind of behaviour doesn't bode well for the future of:
1) The next IPO - if potential investors are nervous about getting a bad deal, they will be reticent to inject fresh money into new companies, in effect making it more expensive for the IPO next in line (having to price lower than reasonable levels to offer a greater potential reward for the risk being taken, and which is perceived as greater due to the performance of this high profile operation).
2) Investment bankers arranging the IPO are normally paid on a success basis. If they collect a set percentage of total funds raised for example, then they win big on an overpriced deal that goes down to a lower market rate afterwards. However, they will earn less on subsequent IPO's as their percentage remuneration will be based on lower prices on more (to the company) expensive capital raised, making bank borrowing funding more attractive. In the long run, they lose on earnings and the trust of investors who expect banks to have been professional and equitable in pricing the issue. Investor confidence in the IPO process will have been dented.
3) Finally, FB - next time they come to market with a secondary issue, have few friends left after such a large "bad deal" for their investors. The cost of capital will be much higher for them next time round.
On this site we all strive to be effective - however effective in the short term and effective in the longer term aren't always the same and need to be balanced. I'm guessing some investment bankers were given the hair drier treatment over this IPO.