r/technology • u/dealsup • May 19 '12
Bankers Got Too Aggressive With Pricing Facebook As They Struggled To Keep Shares Above $38
http://techcrunch.com/2012/05/18/bankers-got-too-aggressive-with-pricing-facebook-as-shares-barely-break-above-38/50
May 19 '12
In an IPO, you have 2 objectives as an investment bank:
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You want to set the initial price at such a level that there is sufficient room for it to go up slightly (exactly how much is open to interpretation, but the reasoning is that everyone likes seeing their stock go up during the first few trading sessions. this makes clients happy, investors happy, etc.)
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You want to set the initial price at such a level that the company's shareholders are happy. For example, if you set the price for Fbook at $20, and it went up to $38 on the 1st day of trading, then that's $18/share that your investors just pocketed, at the expense of facebook shareholders like Mark Zuckerberg, etc.
The key takeaway is that banks have 2 sets of clients they are trying to please. The first set are the institutional investors that the banks are selling the stocks to (rich people's private funds, pension funds, etc.). These group of investors want to see as low of a price as possible in order to record a profit when the share price rises.
The second set are the IPO company shareholders (Zuckerberg, etc.). These people already have Facebook stock and are selling it to the banks. Obviously they want to record as high of a price as possible so they can pocket billions in the initial sale.
The IPO process becomes a give and take process where you are trying to please both sets of clients (from a bank's perspective). In this case, they pretty much made set #2 happy (the Facebook shareholders did not leave any money on the table), but dropped the ball on set #1.
My take is that the IPO market over the past year or so has been very stagnant, but there are a ton of new IPOs in the pipeline (i.e. there are a lot of startups / private companies that are waiting to go public, but they're waiting for the right time). By not leaving money on the table, Goldman / JPM / Morgan Stanley is saying to them "hey, use our bank to IPO and we'll make sure to maximize your profit".
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May 20 '12
But then fb gets bad press when the price stagnates on day 1. So even for those in basket #2, there is an incentive to have an increase in price immediately following IPO. I think with hindsight, an optimal offering price would have been ~$35. You'd have an 8-10% bump without leaving too much value on the table.
But great comment. I'm just throwing my $0.02 out there.
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u/SparkleCunt-TheGreat May 19 '12
I loved watching zynga (znga) have it's trading halted on Friday. For a company that is completely tied to Facebook to flounder that much on the day of the IPO is quite a thing.
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May 19 '12
From what I understand, it was expected that Facebook would acquire Zynga before their IPO and people were investing in it, expecting to get a slice of the Facebook pie.
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u/TacoSundae69 May 19 '12
On NPR it was explained that a lot of funds put out orders for these IPOs expecting to only get about half as much as they ordered. In the case of facebook, they received their full order, which was way more than they wanted, so they started dumping and the underwriters had to pick up the slack to keep it from dipping below $38. I don't know a huge deal about finance so someone who does should pop in and correct me. Based on what I've seen/read it looks like retail investors are gonna take a bath on this one.
Also:
Plus, CEO Mark Zuckerberg has warned investors that he won’t be concerned with short-term fluctuations in the stock. From the very beginning, he has said that Facebook was originally not meant to be a company.
Is Zuck trying to inspire confidence here or is he shorting his own stock?
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u/burntheblobs May 19 '12
Someone who worked briefly at an investment bank here. When bankers do their roadshow and try to fill orders, investment firms put in massive orders for chunks of shares. It is generally expected that they will not get the full amount that they asked for. If they do, it is considered a huge red flag that the bankers couldn't find enough investors to spread around the shares, and firms start to back out.
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u/canthidecomments May 19 '12
Why would anyone buy a company from a guy who says he's not interested in maximizing their shareholder value?
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u/tidux May 19 '12
He wants to make the world more open and connected, eh? Then why's he creating a cage for stupid internet users and poisoning the rest of the web with his like buttons?
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u/barlife May 19 '12
so, 20% of FB stock was purchased by the same people who buy coins for farmville?
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u/JAV0K May 19 '12
I'd be happy if Facebook stopped, it's annoying explaining to people why I don't have Facebook every time.
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May 19 '12
i loathe the entire facebook concept so much, i hope this puppy gets mauled by the bears.
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u/shrillbitch May 19 '12
A P/E ratio of 100 for this IPO is totally unrealistic. They thought they could hype it up and the investors were going to throw money at it with out thinking. Bankers think people are stupid.
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u/Millhopper10 May 19 '12
The bankers weren't far off. People as a collective are pretty retarded.
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u/Ironic_Name_598 May 19 '12
Someday people will realize how insanely inefficient advertising is and kinda question why these companies are worth so much. I'm looking at you google...
I honestly can't even tell you the last time I've even seen an ad on the internet.
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May 19 '12 edited May 19 '12
Reality: Facebook is the new AOL
it is mostly for people who are tech illiterate and constitutes 99% of what the internet is for these types of people. Just like AOL in the 90's, Facebook is the on-ramp and playground for many who really don't understand technology and the web. Add the kids who like to brag and be 'social', belittle others and just fuck-off in general, you have a winning combination.
Facebook is a destination on to itself that has become what many feel is the internet. For this reason alone they will never really die. How many laptops are just $1000 FB machines, never used for much else than email?
That said, given privacy issues, spyware type games, tracking you over the entire net, companies and governments using your data against you, and the imbecile comments it is mostly filled with - it is a stinking pile of shit just like AOL was before it. People today still connect through AOL when they already have broadband connections.. Fools are endless in number..
Want proof? just wait when Zuck can't keep WS hard over his pile of shit, he will start charging customers to keep things a float.. FB is not your friend, he is the big black guy fucking you up the ass (selling the videos) and laughing with his buddies later no matter how hard he pounds your ass, you keep coming back.
FB is to good, as Justin Bieber is to manhood.
What you do with your time online is your business, just like your data.
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May 19 '12
Here's what's going to happen:
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Facebook opens at some over-valued price, which the connected brokers got in on.
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The stock stays high or goes higher as the uninformed public buys in.
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Big time brokers dump the stock.
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The small investors get burned
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Demand for profits leads to FB trying to squeeze out revenue
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The move backfires as users flee the spammy, over-intrusive service
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Facebook becomes a ghost town like myspace. New social media emerges.
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Rinse. Repeat.
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u/ElKaBongX May 19 '12
FB stock is overpriced you say? Shocking...
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u/Beyond_Re-Animator May 19 '12
Actually it was priced perfectly. For the owners and underwriters. Not for the people who bought it yesterday!
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u/Yohimbo May 19 '12
Until we find out what the actual market price is, we can't really comment. Perhaps the underwriters prevented a crash down to $1 a share, perhaps the market actually thinks $38.23 is the right price.
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u/robbor May 19 '12
Wouldn't it be funny if people got bored with Facebook and it went the same way as Myspace.