Facebook IPO a complete failure, unless you were one of the sellers

Facebook came public today at $38 per share.  The underwriters, along with the insiders who were selling stock in the offering, decided to not only increase the size of the offering (the number of shares to be sold), but also increased the price range.  Then they priced the deal at the extreme high end of the range – the highest possible price.  After a 30 minute delay, the NASDAQ finally got their act together and started trading.  They were able to get an initial pop, although it was far less than the usual 32% average pop for tech IPOs, with only about a 13% jump, before fading quickly, and within the first few minutes of trading, falling back to the IPO price of $38.  The underwriters/market-makers fought hard all day to prevent the stock from breaking the $38 level, even though I saw several trades that came across below $38 (they went back and “corrected” those trades (I place corrected in quotes because the market-makers took any trades below $38 and basically ate the difference and reprinted the trades at $38.  This is all about saving face – the underwriters want to be able to say to the sellers, hey, we were right to increase the deal size and to price it where we did because it held up on the first day at that price.  Come Monday all bets are off and then we’ll see what happens.  The underwriters will not defend the bid at $38,  and my guess is that the stock will sink.


The utter failure of Facebook is not only a huge blow to Facebook’s future potential for selling stock on the public markets, but will also make it much more difficult for any other social media companies to sell their stock.  While all deals are evaluated on their own merits, it does matter when the big dog in the industry suffers a humiliating first foray into the public markets.  Potential buyers of the next deal will say, if Facebook couldn’t succeed, what chance does this company have?


What they should have done was to keep the size of the deal at the original level and the offering price at the original range.  The deal would have been smoking hot today, and would have blown everyone away.  It would have been at least a double, and would have impressed even the most skeptical, even those like myself that think the valuation is ridiculous.  Then, not only could they have come back in 6 months or a year and sold 10 times as much stock for what would most likely have been a much higher price, but they would have established a precedent for other social media companies to follow in the future.


Facebook closed at $38.23, up just 0.6% for the session.  Pitiful.  I hope Zuckerberg and the rest are pleased, after all he just cashed out about $6 billion, but if I were him, I would be really disappointed.  Let them try to come back in a year or so and sell more stock.  No one is going to want it, unless they impress with strong actual financial performance.  There is far more risk that they will not perform than probability that they will.


I will be absolutely shocked if the stock does not close below $38 on Monday.  Regardless of where it goes from here, however, the IPO was not a success, and the valuation of the company, most importantly, is nosebleed high… far too high to justify its purchase no matter how you slice it.  Today’s trading action provides even more support and confirmation for my position, which is to avoid this stock like the plague.


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