Facebook: a historical IPO indeed
It was supposed to be a historical IPO. Valued, revalued, increased: Facebook going public was bound to be a saga. Grateful investors were meant to buy 421 million shares priced at $38 (which would have valued the whole company at a whooping $104 billion) and be immediately rewarded with a first-day “pop”.
Indeed, it all started with a pop: the pop of the Nasdaq computer system, which made it virtually impossible for anyone to know if they were actually buying or selling Facebook shares - a glitch that lasted through the week-end until Monday morning.
But when the clouds of the treacherous machine started to lift, the landscape was that of desolation. On Friday, Facebook struggled to remain around its offering price of $38. On Monday, it fell down 11% to $34. Today, it shed another 9% down to $31. In two days of public existence, Facebook has lost several JPMorgan’s bad trades worth. Ouch.
The issue was obvious almost from the start. A shadow of a doubt remained for a few hours on Friday but very soon people faced the truth: the underwriters were stabilizing the deal using the greenshoe.
Wonder what that exotic beast is? It’s quite simple, really: instead of selling the 421 million shares Facebook had already issued, the underwriters sold 484 million shares or 63 million more. How did they pull the trick of selling something that doesn’t even exist?
It’s the magic of finance. When a company goes public, the underwriters can short an additional 15% shares to investors. If all goes well and the company soars, it issues the missing shares at the offering price. Demand met, everyone goes home happy. If, on the contrary, the deal goes awry, the underwriters can buy back these 15% at the offering price thus pulling the shares up. Please note that the underwriters don’t lose or gain a cent in the process.
That’s what happened on Friday. And possibly on Monday. And maybe (although probably not) even today. Where Facebook would be without this convenient help, we don’t know and won’t know for another couple of days. But it is now safe to say that Facebook’s historical IPO is a historical fail.
Of course such a big disappointment caused many fingers to be pointed. Bloomberg has quoted one of the initial buyers complaining that he was sold 40% more shares than he intended to. Apparently, the underwriters invoked a “huge demand” so that many buyers bid for much bigger positions than they expected to get. Unfortunately, they got it all and sold the exceeding shares as soon as they could, thus dragging Facebook down.
Then another baffling timing was exposed: Morgan Stanley, the main underwriter for Facebook’s IPO, reduced its forecasts for Facebook’s revenue in the roadshow to the said IPO. A situation unheard of that is said to have freaked potential investors out.
Sure, Scott Devitt, the Morgan Stanley guy who did the deed, is from a different section of the bank: he’s the bank consumer Internet analyst. Therefore he had all the rights to draw his conclusions and he probably knows what he’s doing: Facebook’s revenue may be lower than expected. But he screwed up the moment he gave that information to all the big investors while the small ones remained in the dark (he was forbidden to make a public annoucement before the IPO). And it is also true that this is one of the worst timing fails in History.
Lastly, Morgan Stanley - again - was pointed at as being responsible of Facebook shares value increase from $28-34 to $34-38. Some people (who, as usual, did not want to be named) implied that there had been some severe disagreements between advisors before the value was eventually increased. All the information comes from Bloomberg.
All in all, it looks like the Gods of Finance wanted Facebook to fail.
But invoking the vicissitudes of Fate is missing the point of this huge cacophony. Which is: how could it pass unnoticed that a company with an obscure and capricious management, an unclear revenue and an uncertain business model should be valued at between 45 and 55 times its supposed revenue? The answer is: it could not.
Unlike Google, Facebook is well-known for being sustained by very simple, some would say insufficient technology. Facebook’s web page was bugged for the first 6 years of its existence and as soon as that issue was settled, the bugs were brought to the mobile application.
Speaking of which, it is now clearly proven that Facebook’s business model, which relies entirely on unwanted advertisement, does not work on mobile phones. No alternate model has been designed so far. Oh wait, Facebook bought Instragram - for a crazy price and without even consulting the board. That is NOT reassuring.
Despite all these reasonable doubts, Facebook’s IPO raised $16 billion. Google’s on the other hand raised $1.67 billion (10 times less!) which valued the company at a much more modest (and yet huge) $23 billion. The discrepancy is much bigger than the very controversial pre-IPO increase in Facebook shares value.
See the paradox? I do. And investors do, too. That is why they are going to do what a financial advisor told me yesterday that they would: “We are now going to keep a close eye on the company management, like we do with any other company. And we are going to make decisions based on it.”
But that is going to take long. And in the meantime, Facebook’s original shareholders will be set free to sell however many shares they still detain, which will not help the company remain at a steady value.
The nice thing about historical parties is that when you think they’re over, in truth, they’re only just starting. And all the fun is yet to come.
