Friday, May 18, 2012

Facebook: The perfect IPO

Posted by Joe Crivelli
By the headlines you would think that the Facebook IPO was a colossal failure. “Was the Facebook Deal Overhyped?” asks CNBC. “Facebook IPO More Whimper than Bang,” exclaims CBS. “Facebook IPO Gets Chilly Greeting on a Cool Morning,” notes Forbes. In the middle of the afternoon on Friday, I walked past the TV in our office lobby and the headline on CNN was “Facebook Bang is a Whimper.”

The conventional wisdom was that Facebook (NASDAQ: FB) would be up big-time on its first day of trading. But FB traded flat, with the offering going out at $38.00 a share and closing its first day at $38.23. So naturally the conventional wisdom now is that the IPO was a flop.

But in reality, from an investor relations standpoint, Facebook executed quite possibly the perfect IPO. Every share that was offered to the market got sold. Like every other time in his life that he has entered the arena, Mark Zuckerberg wins. Here’s why.

I dealt with this issue when I wrote about the Groupon IPO last year, and I’ll say it again. An IPO that has a huge first day is a failed IPO. An IPO that trades flat or slightly up on its first day is an IPO that is priced RIGHT and is a successful IPO. By this measure, Facebook is most definitely a successful IPO. The perfect IPO.

Why? Because the underwriters maximized the amount of money that the company raised. They maximized the amount of cash from the IPO that flowed into the company’s coffers.

When a stock has a huge gain on its first day, it means that the IPO was underpriced. The cash from that huge gain is flowing into the hands of the day trading hedge funds who were given allocations of IPO shares -- many of whom trade out of the stock before the close of trading on day one.

Sure, a huge first-day gain makes for great headlines. Sure, it feels sexy and feels right. Sure, it would have been really cool for the story to be “FACEBOOK UP 40 PERCENT ON FIRST DAY OF TRADING!” But keep this in mind: If the stock was up 40 percent, it would have meant that the company undervalued its IPO by $40 billion. That’s $40 billion. Based on the 420,000 or so shares that were offered, this would have reduced company proceeds by $3.2 billion. That’s 3.2 billion.

So kudos to Morgan Stanley, JPMorgan Chase, and Goldman Sachs, who were the lead underwriters for the FB IPO. You did right by your client and nailed the offering price.

As a final point: There was so much hype about this IPO that everyone expected the price to rise significantly on the first day. I’ll look to a very unscientific sample set for validation of this point. We had a pool here in the office for where we thought the shares would end up at the end of the day. Five bucks an entry. Everyone overshot the mark. Here are bets of the 12 folks who anted up for the pool:

Kate R. -- $71
Jackie Z. -- $75
Kate V. -- $63
Luke N. -- $48
Joe H. -- $55
Matt G. -- $64
Joe A. -- $57
Jim M. -- $52
Mel C. -- $63
Doug R. -- $47
Doug R. -- $84
Greg M. -- $59
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