That Facebook IPO, in full

Posted by William M. Connolley on May 22, 2012
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I’m not the first to say the obvious, but the FT appears to have misunderstood the world:

Some investors accused Facebook of taking advantage of enormous demand to sell at an inflated price it says, commenting on the way FB’s shareprice dropped from $38-ish to $34-ish. To which the answer is… WTF do you think FB is, a charity? If you’re overwhelmed by people desperate to hand over cash in exchange for your shares, then of course you raise the price.

Back in the dotcom bubble era it was fashionable to IPO at well below what you hoped the shares would trade up to. But, that was a bad thing, not a good one. Not just because the companies weren’t getting their money’s worth, but more because it was a sign of bubbliness and, effectively, dishonesty: people who knew (not me, I hasten to add; I fell for the hype too; I was much younger then), knew the kind of valuations being posed were meaningless, and they knew that no-one knew how to value them, and they knew that the best guarantee of the shares going up, was for the shares to go up, because people had no other measure of value than a relative one.

[BTW, we're very close to the great switch-over to WP, this post may oscillate, who knows...]

Refs

* Explaining Facebook’s IPO: The Greenshoe – from Timmy, in the old comments. Fascinating bit of detail. Basically the backing banks shorted the IPO, and this is commonplace, and there is a good reason for it. Finance can be almost as complex as interrupt-driven code sometimes.
* Facebook and the sad case of ethical investment bankers – Bronte agrees with me ;-) but has a probably more astute take on the ’90s IPOs.
* TED is very rude about Bronte, but he is wrong, as Bronte patiently explains.

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Comments

  1. #1 dhogaza
    2012/05/24

    It’s not quite so simple, which is why the IPO is already being investigate by multiple regulatory agencies, including Wall Street’s internal one.

    1. A select group of large institutional investors were supposedly warned a couple of days before the IPO that earning forecasts for Q2 were dropping and for the coming year, as well (compared to those in the prospectus). Retail investers and brokers who cater to them were not informed.

    This selective disclosure pre-IPO is usually illegal in the US, though apparently there are circumstances under which it’s only unethical. This led to several large institutions dumping shares as soon as they received their allotment, dragging the price down (though Morgan Stanley bought enough to keep the price steady on day one).

    2. They unexpectedly raised the number of shares being delivered, leading to large institutional investors getting more shares than they wanted, which again led to immediate selling.

    Not sure about the legality of that.

    Of course everyone knows that getting into an IPO is risky. And that the dotcom bubble was fraudulent by any definition of the term other than the legal one in force in the late 1990s.

    The question in this case is whether or not the IPO *broke laws* that are in place today.

    At least facebook has a business model – advertising revenue – which is supportable at some level. Unlike the champion frauds of the current round of tech IPO mania – GroupOn.

  2. #2 bluegrue
    2012/05/24

    I’ve got a last minute backup copy of this and other comment threads. WMC, please e-mail me, if you want to have a copy. Here are the two going with the original.

    I gathered on Friday that a lot of the shares went to underwriters, whose buy orders kicked in whenever the price drifted below $38. My understanding of these things is meager, but amounts to the notion that such underwriters are paid to do this by selling them additional shares at a lower price. If all of this is accurate, that suggests that $38 was indeed too high, and that overall the company might have made more money from the offering at a slightly lower price.

    Of course, there’s no plausible business model for Facebook to pay a reasonable dividend to shareholders, so the price is based entirely on the Greater Fool theory, and in a sensible world these shares would be overpriced at $5.

    Posted by: Nick Barnes | May 22, 2012 7:35 AM

    The problem with setting too high a price even when demand is high is that a the sellers are going to hold most of their stock (not just the principals, but also most employees) and many of them may be forbidden to sell off before a period of time has passed (Eli seems to recall this is an SEC rule, will ask Ms.Rabett tonight). Too high a price followed by a sell off is not a good thing either.

    Posted by: Eli Rabett | May 22, 2012 8:24 AM

  3. #3 bluegrue
    2012/05/24

    Well, the wordpress did not accept the horizontal rule tags in the previous comment. Just to stress the obvious: Nick Barnes comment begins at the line starting “I gathered “.

  4. #4 William-not-logged-in
    2012/05/25

    bluegrue: thanks for those two comments, its good to have them back.

  5. #5 dhogaza
    2012/05/25

    Eli:

    “but also most employees) and many of them may be forbidden to sell off before a period of time has passed (Eli seems to recall this is an SEC rule, will ask Ms.Rabett tonight).”

    90 days, typically, unless the company specifies a longer term as part of its stock option plan.

    As I understand it, you can put up part of your holdings as part of the IPO, but afterwards, the shares you hold are subject to this 90-day rule. Zuckerberg exercised all his options (a taxable event) and sold enough to cover the taxes with a bit (percentage-wise, in absolute numbers still a fairly staggering sum) left over. So he has to hold the rest at least 90 days.

  6. #6 Vinny Burgoo
    2012/05/30

    Equity is the gateway to environment ambition.

  7. #7 Hank Roberts
    2012/06/10

    nice discussion of statistics, surprises, and markets, vaguely topical; first reference is to a Bank of England speech:

    http://www.metafilter.com/116794/Tails-of-the-unexpected