I feel like this article misses a number of points.
Firstly, the modern IPO is chiefly about giving early investors and staff an exit ticket. It is therefore in their interests to price it as high as possible. The fact that there was significant hype around the business meant that they were able to achieve this valuation. The fact that this is distinct from the original aim of the sharemarket - that is, capitalising firms to create new ventures (Think infrastructure - the golden age of rail, factories, etc) is an interesting side-note.
Secondly, the marketplace often operates on the stupidity of the masses. Intelligent fund managers stay away from overpriced IPOs, the uninformed masses pile in because they hear the hype and are not value investors so don't know/care that the revenues aren't behind the company.
3- A successful IPO is one that is fully capitalised and gives the company new cash.
It is not one that goes through the roof. This would represent a failure of the Merchant Bank to properly capitalise on the company's value (They could have charged a higher value for the IPO as that would have better represented the fair value of the company)
- in fact, in a perfectly valued company it should track mostly flat as the investor return is priced into the dividend + some accumulation of value.
The Facebook float, and the Zynga float, and numerous others, thus represents a good example of management and investment banks fully capitalising on the hype surrounding them to extract maximum returns for the early investors.
The fact that this screws later investors is secondary.
With all due respect, I completely disagree. If you understand the fundamentals of an IPO, as I explained below you would know that there is a 180 day lock-up period for employees, this means that employees haven't been able to sell their stock yet. When they do sell their stock it will be at $10/$15/share. The only folks who made money on the IPO were Merrill Lynch who SHORTED IT!
You're typically supposed to IPO at the point you are preparing to grow. Not flatline. Your original argument is exactly what I'm saying is the misguided philosophy of Silicon Valley, and the Tech Community as a whole. Again, no offense, but step back and look at what I just said. I have a point. This IPO fucked everyone, including Zuckerberg, employees, and anyone else who still holds shares which as I said above is every single employee.
In this case "extract maximum returns for the early investors" means that a whole lot of people got ripped off.
The notion that "the modern IPO is chiefly about giving early investors and staff an exit ticket" is a near perfect example of how "Silicon Valley, I hate to say it, has its head so far up its ass that it's eating its own bullshit."
The investors purchasing Facebook at IPO and after are not looking to reward early investors or hand some sweet exit to a founder.. they are looking for a return on their investment dollars.
If this is the prevailing attitude regarding the purpose of capital markets in Silicon Valley, I would be shocked if the IPO market for new tech stocks didn't shrivel up and die in the next (last?) few months.
How odd that there is an excellent article sharing the front page about American "Looterism" replacing American Capitalism.
My only comment is that if you can make an overpriced IPO, that is good for you. It is bad for the suckers who were dumb enough to buy in, but that is a different story. If the share price goes up quickly after an IPO, the price was too low. If the price goes down quickly, it was too high, but why should you care? If you want to pay me $1.50 to buy $1 bills, I will sell as many as you will take. The current market valuation only really matters when you want to trade. Otherwise, worrying about your stock price is a bit of a pissing contest. BTW, I did not buy Facebook or Zynga. They were both pretty obviously over-hyped and overpriced (it seems most IPOs in most industries are), but the stock holders prior to the IPO made out like bandits during the IPO.
Logical explanation, however the point of an IPO is not just liquidity in for your employees, but also to raise money for the company, and allow the public to buy in. If you don't price it so the price goes up, then you're doing everyone, even your shareholders a dis-service because they have a 180 day lockup period, so when the stock is at $15/share at the end of lockup, you actually screwed employees as well. The only person who actually made money on this was Merrill Lynch.
You want a high IPO price, but not so high that you can't meet expectations and disappoint. Get tagged as an underperformer and it makes it hard to do future stock acquisitions, financings, hires.
Wow.. to the top level commenters who rationalize the merits of the Facebook IPO as successful in extracting the maximum amount of money for investors and employees.. this is the type of logic that warrants the criticisms thrown at Silicon Valley.
Not withstanding the fact that the redistribution of wealth was based on 'hype' and just a douchy move, does no one seem to understand that the IPO market will inexorably implode yet again through such self-serving actions, thereby closing future IPO opportunities for companies with real revenues and growth?
This is a stupid argument. The character "flaws" the author cites are basically why much of the technological progress of the past several decades originated in Silicon Valley.
Seems a bit snarky to me. Engineers don't price IPOs, bankers do. And because of that it reads more like
"I'm really pissed off you are now rich and I am still not rich."
or perhaps
"I thought it was going to go through the roof and so I bought some and it didn't so I lost a lot of value and now all this stuff that I'm reading makes me look stupid for having believed it in the first place."
I've mentioned elsewhere that when I read stuff like this I feel sympathy for the Author because I think they might be in a lot of pain over something and trying to work through it. Not everyone has good tools for that, sometimes just screaming at the top of your lungs makes you feel better.
As a person who lives in Silicon Valley and could easily be painted by William's broad brush strokes as someone who "has their head so far up their ass that they are eating their own bullshit" I regret to say that I've not lost (or gained) any money on Facebook stock, don't own a single share, and like a lot of people here don't own it because I didn't feel it merited a price over $30 a share. This isn't because I'm a genius and or smarter, its because I looked at the business and said, "You know I don't think it supports that valuation."
But that said, its a hell of a business. Facebook made over a BILLION dollars last quarter, that is over four billion a year at those rates. I was at Sun 10 years and it just just crested $3B on its ways "hopefully" to $5B and folks were estatic. It is pretty impressive what these Facebook folks are doing.
But what William is so upset about is its stock price. And to that I'd say why the hell do you care what the price of Facebook's stock is? What does it matter? Smarter people than you are evaluating it every day and making bets on whether its priced higher or lower than its future value, as they play that game they exchange money, it's sort of a score keeping system with them, and they have more strategies than a roulette player has ways to "beat the house."
Now if you're an executive at Facebook you care because it limits your options when it goes down, as an employee maybe it changes the model plane or boat you can buy, as an outside observer it means nothing. So why the angst?
[+] [-] robbiep|13 years ago|reply
Secondly, the marketplace often operates on the stupidity of the masses. Intelligent fund managers stay away from overpriced IPOs, the uninformed masses pile in because they hear the hype and are not value investors so don't know/care that the revenues aren't behind the company.
3- A successful IPO is one that is fully capitalised and gives the company new cash. It is not one that goes through the roof. This would represent a failure of the Merchant Bank to properly capitalise on the company's value (They could have charged a higher value for the IPO as that would have better represented the fair value of the company) - in fact, in a perfectly valued company it should track mostly flat as the investor return is priced into the dividend + some accumulation of value.
The Facebook float, and the Zynga float, and numerous others, thus represents a good example of management and investment banks fully capitalising on the hype surrounding them to extract maximum returns for the early investors. The fact that this screws later investors is secondary.
[+] [-] wkasel|13 years ago|reply
You're typically supposed to IPO at the point you are preparing to grow. Not flatline. Your original argument is exactly what I'm saying is the misguided philosophy of Silicon Valley, and the Tech Community as a whole. Again, no offense, but step back and look at what I just said. I have a point. This IPO fucked everyone, including Zuckerberg, employees, and anyone else who still holds shares which as I said above is every single employee.
[+] [-] aniro|13 years ago|reply
The notion that "the modern IPO is chiefly about giving early investors and staff an exit ticket" is a near perfect example of how "Silicon Valley, I hate to say it, has its head so far up its ass that it's eating its own bullshit."
The investors purchasing Facebook at IPO and after are not looking to reward early investors or hand some sweet exit to a founder.. they are looking for a return on their investment dollars.
If this is the prevailing attitude regarding the purpose of capital markets in Silicon Valley, I would be shocked if the IPO market for new tech stocks didn't shrivel up and die in the next (last?) few months.
How odd that there is an excellent article sharing the front page about American "Looterism" replacing American Capitalism.
[+] [-] goodcanadian|13 years ago|reply
[+] [-] wkasel|13 years ago|reply
[+] [-] RockyMcNuts|13 years ago|reply
http://www.businessinsider.com/facebook-lockup-release-2012-...
You want a high IPO price, but not so high that you can't meet expectations and disappoint. Get tagged as an underperformer and it makes it hard to do future stock acquisitions, financings, hires.
[+] [-] joshuahong100|13 years ago|reply
Not withstanding the fact that the redistribution of wealth was based on 'hype' and just a douchy move, does no one seem to understand that the IPO market will inexorably implode yet again through such self-serving actions, thereby closing future IPO opportunities for companies with real revenues and growth?
[+] [-] pbreit|13 years ago|reply
[+] [-] wkasel|13 years ago|reply
[+] [-] PaulHoule|13 years ago|reply
[+] [-] rdl|13 years ago|reply
[+] [-] azat_co|13 years ago|reply
[+] [-] ChuckMcM|13 years ago|reply
"I'm really pissed off you are now rich and I am still not rich."
or perhaps
"I thought it was going to go through the roof and so I bought some and it didn't so I lost a lot of value and now all this stuff that I'm reading makes me look stupid for having believed it in the first place."
I've mentioned elsewhere that when I read stuff like this I feel sympathy for the Author because I think they might be in a lot of pain over something and trying to work through it. Not everyone has good tools for that, sometimes just screaming at the top of your lungs makes you feel better.
As a person who lives in Silicon Valley and could easily be painted by William's broad brush strokes as someone who "has their head so far up their ass that they are eating their own bullshit" I regret to say that I've not lost (or gained) any money on Facebook stock, don't own a single share, and like a lot of people here don't own it because I didn't feel it merited a price over $30 a share. This isn't because I'm a genius and or smarter, its because I looked at the business and said, "You know I don't think it supports that valuation."
But that said, its a hell of a business. Facebook made over a BILLION dollars last quarter, that is over four billion a year at those rates. I was at Sun 10 years and it just just crested $3B on its ways "hopefully" to $5B and folks were estatic. It is pretty impressive what these Facebook folks are doing.
But what William is so upset about is its stock price. And to that I'd say why the hell do you care what the price of Facebook's stock is? What does it matter? Smarter people than you are evaluating it every day and making bets on whether its priced higher or lower than its future value, as they play that game they exchange money, it's sort of a score keeping system with them, and they have more strategies than a roulette player has ways to "beat the house."
Now if you're an executive at Facebook you care because it limits your options when it goes down, as an employee maybe it changes the model plane or boat you can buy, as an outside observer it means nothing. So why the angst?
[+] [-] wkasel|13 years ago|reply