Most companies leave a lot of money on the table when they IPO. They price at $12 to $15 per share at the IPO and trade up to $20 - $25 on the first day, and up to $30 to $40 over the next few months. Investors are happy. The press is writing positive stories. Everyone is happy. But, the company left all that money on the table, the difference between the $12 IPO price and the $25 first day close. This can mean hundreds of millions of dollars for the company.
Facebook optimized the value of the IPO to the company by pricing high, and brought in billions of dollars in cash. Facebook stock closed at $38 per share on the first day, and most of that cash went to Facebook. Great result for Facebook. They worked hard to find the share price where they could sell all the IPO shares at the highest possible price, and generate the most cash for the company.
But, by doing so they disrupted the age old IPO process. Now investors are paying the price. Investors who bought the IPO shares thinking they would immediately go up 20% to 50% were sadly mistaken. In fact they have gone down 50%. The press is writing negative stories about how Facebook is declining, user growth is slowing, they don't have a good mobile strategy, and that monetization is awful. Facebook hasn't changed their strategy in the past few months...but public perception has changed.
The original VC investors in Facebook, and employees who hold stock option grants are "locked up" and normally can't sell their shares until 6 months after the IPO. Normally there would be a Secondary Offering where they could sell their shares in an orderly fashion to institutional investors. This is why they call the first selling of stock the IPO (Initial Public Offering) and the second selling of stock "The Secondary Offering".
Facebook also changed up this process by letting some investors sell some stock at the IPO, and letting other early investors and employees sell their stock after 2 months, or 3 months, or some other time period they stipulated. By doing so they kind of messed up the idea of a Secondary Offering because stock was dribbling out...actually, exploding out, in chunks over the first 6 months and beyond.
The Secondary Offering is normally supposed to be done about 6 months after the IPO, in a very positive environment for the company. Because there are a limited number of shares sold at the IPO there is more demand for the stock than there is supply. This creates a hot competitive environment for the stock and the price goes steadily upward. Perfect time for a Secondary Offering of the "locked up" shares from early VC investors and employees.
Facebook essentially can't do a Secondary Offering now because the stock price has dropped so far, so fast, that institutional investors are worried. They just heard the Facebook IPO story a few months ago, and now everything looks bleak. The press is writing negative stories. Bad timing.
Facebook stock is currently trading at around $19, and has declined to about half of its opening day IPO price of $38. The price could decline even further with the hundreds of millions of shares coming off "lock up" flooding the market over the next several months. Normally this is done in an organized Secondary Offering to institutional investors. Instead, in the current situation, it will be totally disorganized with shares coming out at odd times, and dumped on the market for retail investors and brave mutual fund managers. The flow of shares and price can't be controlled by the IPO investment bankers the way they would with a Secondary Offering.
So, Facebook did a great job maximizing the value of the IPO cash proceeds, but totally botched the normal process for an orderly Secondary Offering. Facebook did great. Investors are getting killed. Proceed with caution. With most IPOs you are probably better to wait until the dust settles, most of the locked up shares are on the market, and the company has reported a few more quarters of financial results. The stock market will stabilize around an agreeable price. This is true of most IPOs and appears to be true with Facebook too.
Long term I think Facebook has a very bright future. Short term it is unpredictable and potentially dangerous for investors.
Disclosure: I own no Facebook shares, and my day job is with Google. I am NOT a financial advisor and am NOT giving financial advice here. This is just my opinion, and is worth what you paid for it...nothing.
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