Facebook $

Warning to Readers: I’m venturing into territory where (a) I know even less than usual and (b) I haven’t been at all diligent in reading the public record or commentary, so feel free to skip this!

With Facebook trading at around 34 or 35 compared to the IPO price of 38, It strikes me that Facebook has managed its IPO masterfully to get the most money for the inside sellers of the stock, and the least for the Wall Street managers and greedy/fanboy first day buyers. This management included a wall street rumor on the day before the IPO that based on the roadshow the managers would have liked to raise the offering price to 41 or 42 but were precluded from doing so by the terms of the initial solicitation. As it was they were able to increase the number of shares issued at 38. I have no clue whether this rumor was honest or intentional market manipulation, but judging by the outcome it was certainly a good thing for the Facebook insiders who were selling in the IPO.  Whether in the long run it will be good for future companies raising funds through IPOs is another question.

On the other hand, Zuckerberg’s surprise (to the guests —  presumably not to the bride) wedding following his girlfriend’s graduation from medical school was clearly a class act.

17 thoughts on “Facebook $”

  1. There may be “Suckerborg” jokes going the rounds…
    Matt Yglesias has the right basic take on this. Facebook is a cash machine like Google and doesn’t need to raise capital. The purpose of the IPO is entirely for insiders to cash out part of their hitherto illiquid stakes. The new shareholders are a nuisance. Wanna bet Facebook will ever pay dividends?

  2. The purpose of the IPO is entirely for insiders to cash out part of their hitherto illiquid stakes.

    Probably, though I don’t see any problem with that.

    Wanna bet Facebook will ever pay dividends?

    I think it will, though not for many years. I also think the current price is silly.

      1. Right. Those poor suckers who bought in early had to wait years to make anything on their investment.

        1. Actually, Microsoft shareholders were perfectly content never to receive dividends, because the retained cash was simply priced into the value of the stock. It was the IRS who ultimately forced Microsoft to pay some of that cash out as dividends — it was a tax dodge while it lasted.

  3. This is a smart post. Aside from the trading glitches; contrary to the CV, this IPO went well. Banks, well at least their Corp-Finance IBanking wings, represent the Company for whom they are raising money. Theoretically, if an IPO rockets upward in price on its first day of trading, the Bankers did their client an injustice…having left lots of money on the table.

    In reality, tech IPO’s are often designed to take off. Why? The IBankers know the valuations are BS. No smart money is going to come in. So, by pricing the IPO below what the market is willing to pay, they create a way to make money on the stock that has nothing to do with the stock’s fundamentals.

    Hedge Funds buy the worthless offering at the IPO price. From that, the Client gets his money and the Bankers their fees. Then the public bids the worthless stock up even further. This creates a lot of volume and the Hedge Fund then sells at a tidy profit. No one begrudges them at the time since the stock continues to skyrocket. The Public thinks they are actually smarter than the Hedgies who sold low and that mentality continues until the bubble bursts.

    When a Bank with less pedigree than the Morgans of the land do this, its called “pump and dump”.

    The facebook IPO was, in contrast, an old-fashioned proper and rational offering.

    1. The notion that an IPO was a big success if the price jumped dramatically the first day is really strange. Those who sell at the offering price – the company or individuals – get much less than they could in excahnge for a brief burst of publicity. Of course, it is a convenient way for the underwriters to both protect themselves – by underpricing – and pay off, I mean reward – favored constituencies, like other clients, actual or potential.

      1. Well that, and (1.)the underwriters (investment banks) handling the IPO have to protect their inventory; (2.)The cost basis for insiders is so low that this “loss” is really irrelevant, and (3.) What James Wimberly said. Some here might also check out what JW Mason has posted on this matter.

        PS: The P/E ratio is absurd, and the model is essentially replicable (unlike the Microsoft monopoly).

    2. In the past I have had harsh things, mostly in other fora than this, to say about Manju’s posts, but he is spot on here. Byomtov’s right, too. During the tech boom in the 1990s it was common for bankers to allocate a round lot or so of IPO shares to an important client (or target client), sell the shares into the pop, book the difference to the client’s account, and only then call the client with the happy news of his shrewd and profitable short-term investment. Was this bribery? You might very well think that; i could not possibly comment.

  4. Quincy:

    Were you being sarcastic with Zuckerberg’s surprise wedding?

    It was timed so that she will have no claim to his wealth; in most states, a spouse cannot take pre-marital assests in a divorce.

    I am not attacking his move, and am supportive of pre-nups, but to most people, that would not be considered a classy move, since it violates core tenants of romantic love.

    Please correct me if my understanding of pre-marital assests in California is incorrect above.

    Frank

    1. I don’t think a place where core tenants get violated would be a good place to rent an apartment. I’d look elsewhere.

      Also, what Matt Wilbert said.

  5. He had the assets before the IPO–they were just illiquid. I don’t think that would matter much, but I’m neither Californian nor an attorney so my thoughts may not be accurate.

    1. That’s OK. Somehow, I suspect that – for all I try to be a romantic and hope they expect to and will have a long and happy marriage, with utter mutual trust – plenty of excellently qualified California attorneys were involved in formalizing the terms of this wedding. There was just so much money involved, not to mention formal control of Facebook.

  6. True about their liquidity status, but it would be very difficult prior to value the business or her cut…

    1. Huh? FB shares had a very clear valuation – every time FB raised money, for instance. Further, given that there was a secondary market for pre IPO FB shares, they had an even clearer valuation than most pre IPO shares. Not to mention the countless

  7. GM played their Patriotic role as the Canary in the coal-mine Sentry. Publicly pulling out their advertising two days before IPO was a message to America: “Don’t buy this junk.”

    “Mom, Apple Pie, and Chevrolet.”

  8. A great deal depends on how the conventional wisdom goes here. The idea of an IPO where the lion’s share of the profits go to the company and its founding employees (oh, yeah, and the VCs) rather than to brokerage houses and their favored customers/partners has become unusual — another sign of the way that the financial sector has rigged the polity in its favor.

    But thus far all the major-media coverage I’ve seen has been about how the IPO fell flat, rather than about how nicely FB and its insiders did by selling near the top of the market. If that coverage continues, other companies about to go public will probably feel compelled to pay the (recently become) usual ransom to the investment banks and brokers.

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