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Facebook and its bankers priced today’s IPO well.This morning, when the stock finally started trading, the fair-market price for the stock was about $40–just a couple of dollars north of where the deal priced.
This modest increase meant that Facebook didn’t make the expensive mistake that most companies make, which is to let their bankers price the IPO too low and then see a huge IPO “pop.” Although these “pops” are often viewed as a sign of a successful deal, they’re anything but. They’re merely a sign of that the IPO was underpriced: The company and its bankers give pots of free money to IPO buyers for doing nothing more than placing orders. (See: “Congratulations, LinkedIn, You Just Got Screwed!“)
To illustrate this, imagine selling your house to a real-estate broker today for $1 million only to have the broker turn around and sell it to a buddy tomorrow for $2 million (a huge “pop”). If that happened to you, you’d feel like a moron. You’d also feel ripped off. And that’s exactly what happens with IPO pops.
The ideal IPO is priced just below the market value, just as Facebook’s was. This meant that Facebook and its selling shareholders got nearly full value for their shares.
It also meant, importantly, that individual investors who bought the stock after it started trading didn’t get stuck buying it at a truly ludicrous price–say, $70. (At $40, Facebook’s stock was merely very expensive, not absurd).
And it also means that Facebook won’t have to try and fail to live up to a preposterous price.
So the deal was priced well.
But by the end of the day, the broader market, and Facebook’s stock, were breaking down.
In the last 15 minutes of trading, Facebook’s stock threatened to break through the IPO price of $38. At that point, as they always do, the company’s underwriters stepped in to buy shares, trying to keep the stock above the IPO price. And, as they did earlier in the day, they succeeded. The stock closed just above $38.If the broader market continues to deteriorate, and there’s no excellent Facebook news over the weekend, Facebook’s stock will likely make another run at $38 on Monday. And, once again, the banks will likely buy humongous amounts of stock to try to keep the stock above the IPO price.
But, if the selling pressure becomes too intense, the banks will give up–and let the stock fall to wherever the new market price is.
And because the banks probably artificially propped the stock up at the end of the day today, there may well be a gap between the true current market price and the price at which the bank-supported stock closed.
So that means that anyone who still owns Facebook might be in for a rude awakening if and when the stock cracks the IPO price.
But doesn’t that mean that the deal was overpriced?
The market value for Facebook’s stock for most of today was ~$40. It wasn’t just the company’s banks that were buying it at that level–nearly 600 million shares changed hands. That’s more than the entire amount of stock sold in the IPO.
So anyone who doesn’t think Facebook is worth $38–a conclusion that would beg the question why they bought it–could have gotten out today with a gain.
Companies and underwriters do not owe investors a positive return for buying IPOs. And trading stocks is a risky business. So no one should feel that, if Facebook’s stock does “break” the IPO price, investors got screwed. (No one forced them to invest. And lots and lots of people warned that, even at the IPO price, Facebook was very expensive.)
In any event, Monday will be interesting.
As I’ve said frequently over the past few weeks, Facebook’s current business does not support the IPO valuation. To justify that valuation, Facebook will have to roll out products and services that we haven’t seen yet. So it will be interesting to see whether investors are as committed to the “long term” as they were when they also hoped that Facebook’s IPO might deliver an IPO “pop” for the ages.
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