Facebook IPO Wasn’t a Flop…It Was Perfect

by JT McGee

The Facebook IPO is big news. It was perceived to be a total flop – why didn’t the company rally 200% in a single day?

Why didn’t Facebook go up? Stocks only go up, right?!

I think Buffett’s wisdom is appropriate here:

We never buy into an offering. The idea that something coming out…that’s being offered with significant commissions, all kinds of publicity, the seller electing the time to sell, is going to be the best single investment that I can make in the world among thousands of choices is mathematically impossible.

In short, Facebook controlled all the variables that affect whether or not a stock sells at a value price. Thus, Facebook maximized the amount of money it could receive for the portion of the company floating on the market.

IPO are supposed to be fairly-priced. Rarely do you find that an IPO that sells for a depressed price because of the variables going into the sale. Facebook’s IPO was very different from other recent tech firms.

  1. Facebook floated a lot of stock at IPO, so it wasn’t subject to the same supply and demand constraints of Zynga, Zillow, and other stocks that popped on IPO date.
  2. Facebook wanted the cash. Facebook had every intention of sucking the markets for every dollar that they would give. The company raised some $11.8 billion at IPO price, which was, at this very moment, 33% higher than those shares are worth right now.
  3. Facebook already IPO’d, basically. SecondMarket, a “stock exchange” for accredited investors, already granted the opportunity to buy into Facebook to large investors. Those investors did not need to pick up shares at IPO. The IPO was all about bringing the issue to retail investors – you and me.
  4. Individual investors in the aggregate are not better judges of a business’s value than investment bankers. In much the same thread, I am not nearly as good of a surgeon as someone who does it full time. Hence, I would never be so silly as to start cutting into a friend and call it medicine.

Please, for the love of all things holy, don’t play IPOs. And to take it even further, don’t play growth stocks, especially not large cap growth stocks. History proves how easily investors get burned with growth stories. Not surprisingly, it’s the small companies priced for no-growth that give investors the best return in the long-haul:

Please note the scale of the chart.

Be back tomorrow with another post. Just a thought I wanted to share.

{ 5 comments… read them below or add one }

Money Beagle May 23, 2012 at 09:23

Facebook took any potential ‘pop’ and short term gains off the table when they increased the float by approximately 25% and increased the share price. From a pure numbers standpoint, the got the maximum value from their IPO but they sacrificed a lot of potential buzz and positive outlook that would have come had there been a pop. It will take time (a lot longer than 2-3 days of trading) before the marketplace establishes whether or not sacrificing buzz and positive momentum was worth it, or if it was a short-sighted cash grab.


JT McGee May 23, 2012 at 11:45

Yeah the greenshoe strikes again! I’m really surprised they were even able to sell that much at the price set at IPO. I thought they would have to have a much lower float to get a $100B valuation on IPO day.

I think sacrificing buzz is always worth it. Headlines be damned, FB now has a lot of cash on hand! Thanks for the comment.


PK May 23, 2012 at 10:32

Ha, I was going to write something similar (and still might). But, just like a fairly priced house which only gets one offer (versus an under-priced house where everyone is happy about 50+ bids)… Zuck is a savvy operator. The point of the company going public is to maximize the amount they raise. In fact, the only way they could have done better would have been to set the offering at 42.99.

Congrats, Zuckerberg.


JT McGee May 23, 2012 at 11:43

Beat ya!

Hey, did you see where Zuckerberg even negotiated down the I-banking fees on the issue? Apparently FB gave up only something like 1% of the IPO in fees, which is practically nothing.


Money Bulldog June 27, 2012 at 17:19

Imagine the earnings if Facebook were to charge for it’s service. Users have years of their life uploaded to Facebook, they might just accept a small monthly fee to not have the hassle of changing their social network!


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