facebook stock IPO


As Facebook Inc (NASDAQ:FB) endured another down day on Monday, market watchers continue to wonder if the company’s IPO was such a good idea. A devil’s advocate will say not so fast; Facebook didn’t do such a bad thing by going through with the IPO as other factors affected the debut.

Take a look:

IPOs in general are bad investments

IPOs in general perform badly. Firms go public so insiders can raise capital, and also get out. They time the IPO to their benefit, not to one of shareholders. Numerous studies have shown that IPOs under-perform the market. It makes sense, companies time their initial public offering to make the most money possible. Facebook Inc (NASDAQ:FB) has gotten more attention simply due to its size. However, it is little different than other IPOs which have disappointed investors.

Investors shouldn’t have been so surprised

We think investors shouldn’t have been so surprised how things shook out. In a May 7 story, we wrote that most value investors stayed away from Facebook’s IPO. This included Warren Buffett; he said he would not buy it.

With Mark Zuckerberg having a 57% control of the company, shareholders can only hope he’ll manage his $57.51 billion company well. You have to think other shareholders won’t have a lot of say-so. Why would the culture change now if Zuckerberg hadn’t been willing to take his hoodie off when meeting investors?

Add in the other factors affecting the company such as Yahoo lawsuits, FTC privacy issues, increasing competition, revenue from Zynga and the fickle nature of social media, well, why should you be surprised there were problems with the IPO?

The private market set the valuation

Prior to Facebook going public, the company raised its target price thanks to a strong demand from investors for its shares. After initially setting the price in the $28 to $35 range in early May, Facebook executives and the company’s IPO underwriters hit the road for two weeks, speaking with potential investors and gauging the demand for the stock.

Yes, the demand was high or “nothing short of pandemonium” as noted by CNN.

From the crazy response, the group then raised share prices to $34 to $38 in Securities and Exchange Commission filings on the Tuesday before its IPO. Facebook closed today at $26.90, below the lowest valuation range in May. Any long term investor should not care because the stock is trading at a ‘discount.’ If Morgan Stanley raised the price to $38, what difference does it make?

Keep in mind, the final price was the one Facebook’s underwriters sold to their clients; this usually encompasses large institutional investors, mutual funds and hedge funds. Or, the private market, as retail investors don’t get a shot at the stock until it opens on the public market.

In this case, it was the NASDAQ OMX Group, Inc.(NASDAQ:NDAQ) and well, we know how well that went.

Things Just Happen

This may be my favorite one: things just happen. For retail customers trying to get their Facebook orders executed on opening day, many brokerage firms were affected by the NASDAQ glitch, which now counts 30 million improperly executed shares, according to AdvisorOne. This included Scottrade, Charles Schwab and Fidelity getting flack from their customers.

Over at Fidelity, according to Reuters, the company had been dealing with “thousands” of brokerage clients who had been hit with Facebook trading issues. The article quote unidentified advisers who said that “many investors have found that their orders for Facebook were not executed at the prices they thought.”

But this is really the gist of what happened as noted by Scottrade spokesman, Whitney Ellis: the “issues were industrywide and beyond our control.” Unfortunately for some of the firms, many unhappy customers will look to the courts as the only real venue for resolution.

The flash crash happened a few years ago and we still do not know the details. Few things work out perfectly, especially with an IPO this large.

Does it make sense?

There’s more reasons to say not so fast but at the end of the day, people obviously wouldn’t have complained about the IPO if the market had gone the other way–meaning, they made money. I also think that Mark Zuckerberg wasn’t super enthusiastic about the whole thing and if it ain’t broke, why fix it?

Even though Zuckerberg did sell a large number of shares on the open, he has most of his wealth tied up in the stock. Why would he want the price to tank? He does not want to lose money. Clearly, this was not some intentional plan to scam investors.

Chart Source: Business Insider, May 17, 2012


Time will tell where this stock goes but if people really believe in the company, share prices will rise and the long-term value won’t be affected. No users left Facebook because of the IPO debacle, and it did not effect revenue of the company. So it does not really effect the valuation of the company.

So whats the big fuss about?