Did Facebook Lose Face?  Why Its IPO Was A Success!

By Shlomo Maital


     Wall St. and the media are combining to sell a baldfaced lie – that Facebook’s IPO was a flop.  It was actually a big success.  Here is why.

   Some 17 years ago, Netscape made a “successful” IPO on August 9, 1995, according to all accounts.  “ The stock was set to be offered at $14 per share. But, a last-minute decision doubled the initial offering to $28 per share. The stock’s value soared to $75 on the first day of trading, nearly a record for first-day gain, the stock closed at $58.25 meaning a market value of $2.9 billion.”

   Hey! Success for whom?  Let’s ask, what’s the function of an initial public offering IPO of stock?  To raise money for the company so that it can invest and grow!  NOT to make money for Wall St. traders, insiders, bankers and fat cats.  It’s for the company!  Facebook raised nearly $16 b. for the company, for future growth and investment. That, my friends, is a big success.   By putting a low initial price on Netscape stock in 1995 (even after doubling it), the underwriters cost Netscape massive sums that could have helped it battle Microsoft’s Internet Explorer, which eventually blew Netscape’s browser out of the water. If they had priced Netscape stock at $50 a share, instead of $28, they would nearly have doubled Netscape’s funds raised from the IPO.

  Why then all the talk about failure?  Here is what Bloomberg is saying:

    Facebook Inc. (FB)’s initial public offering, plagued by trading errors and a 16 percent drop in the share price, will push more individual investors out of a stock market they already distrust after the financial crisis.  “This is clearly the latest in a long string of events that is eviscerating the confidence investors have in the market,” said Andrew Stoltmann, a Chicago attorney who represents retail investors. “The perception is Wall Street jiggered this IPO so the underwriters made money, Facebook executives made money and the small investor got left holding the bag.”  Buyers of the stock have sued Facebook, the sale’s underwriters and Nasdaq OMX Group Inc. (NDAQ), the exchange handling the listing.  Federal securities regulators and the U.S. Senate’s banking committee have said they will or may review the Facebook offering.   Federal securities regulators and the U.S. Senate’s banking committee have said they will or may review the Facebook offering.     Individual buyers’ willingness to venture into stocks was undercut by difficulties in executing trades on the first day of trading on May 18, Facebook’s subsequent decline and questions over whether the firm and underwriters selectively disclosed material, nonpublic information.  “If you have a lot of angry people out there, they’re going to express their anger in different ways,” said Steve Sosnick, equity risk manager for Timber Hill LLC, the market- making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc. (IBKR) “One of them may be with their feet.”   The IPO produced the worst five-day return among the largest U.S. deals of the past decade. The 13 percent decline through May 24 exceeded the 10 percent drop by MF Global Holdings Inc. in its first five sessions. Visa Inc. did best among the biggest deals, rising 45 percent.

  Failure? Sure – for the small investors who were duped into buying Facebook shares, hoping for a quick ‘flip’.  And for the insiders,  close to the warm fireplace of Morgan Stanley, the underwriter, who get to buy shares at a discount before ordinary people do.   But that’s not the goal of an IPO. The goal is to raise money for Facebook. And it did.  When  will the media stopped propagating Wall St.’s egocentric view of the world, that measures everything by the bottom line of financial services and individual traders? 

    The bottom line is, the initial price of a sale of an initial offering of shares should reflect true value.  Facebook’s $38  price did that.   If Wall St. didn’t cash in and make billions, well, tough.  Those billions belong to the company, not to Wall St.  Why is that simple point so hard to understand?  Why should we mourn the loss of another Netscape – an episode that ushered in the dot.com bubble, and the 2000/2001 disaster, that heralded the 2008 global collapse?