Wednesday, September 5, 2012

Lessons from Facebook’s IPO

Facebook investors aren’t happy. The company’s shares were priced at $38 for the initial public offering (IPO) but now trade around $18. One writer, Andrew Ross Sorkin, blames this “debacle” on Facebook’s chief financial officer, David Ebersman. Sorkin seems to treat IPOs as a cooperative venture among investors, offering banks, and the company going public where the goal is to set a fair price. In reality, there are competing interests.

Sorkin says “it is remarkable that nobody — no bankers, no one at Nasdaq, no one at Facebook — has been fired for botching the offering.” I can’t see why Facebook would see the offering as a failure. If the offering had been at a lower price, Facebook would have received billions less in investor money.

At its core, an IPO is a transaction where a company sells its shares to investors. Why is it surprising that the company would want the highest price it could get? No doubt Facebook will face some problems due to its falling share price. But these problems seem small compared to having an extra few billion dollars in its coffers.

Facebook is unlikely to have to make a secondary offering any time soon. This gives them plenty of time to weather the current storm of investor unhappiness and execute their business plan. I have no idea of how successful Facebook will be over the next 5 or 10 years, but I doubt that current short-term investor unhappiness will matter much in the long run. However, having an extra few billion dollars may help a lot in driving future Facebook business success.

I don’t recommend participating in an IPO, but if you are considering doing so, remember that it is not a love-in; it is a transaction where the company going public is on one side and you are on the other.


  1. Mark Cuban's blog pointed this out as well, which led me to think that Facebook's cash-grab was such a smart move I would almost like to own shares. If they weren't so over-priced in the IPO that is :)

    Seriously, if people can't lose money by making bad decisions in the stock market, it would be a much less attractive place to invest.

  2. @Simply Rich Life: The idea seemed so obvious that I'm not surprised that others have made the same observation. The only bad decision I try to exploit is the tendency for investors to think short-term and avoid risk, which inflates the risk premium.