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IPO Pricing 101
 

Edmundo Braverman's picture
ST
(Human, 14,705
 
Points)
 on 5/21/12 at 7:30am
2012_05_zuckers.jpg

There was much wailing and gnashing of teeth at the close on Friday over the perceived lack of performance in the Facebook IPO. The stock priced at $38, opened at $42.50 (after a few hiccups at the NASDORK), and closed at exactly $38 after an effort by the syndicate members akin to the Spartans at Thermopylae to keep it from dropping below the offering price. The retail rubes screamed bloody murder, with the NY Post running the headline pictured here claiming that Facebook soaked Main Street for $20 billion.

Where was the pop? Shouldn't Facebook have screamed up at least 50% on the open? Where was Johnny Lunchbucket's payoff for putting 2 and 2 together that Facebook is a popular social media site?

I'm here to tell you boys and girls that Facebook might have been the most perfectly priced IPO I've ever seen. Morgan Stanley did a masterful job pricing the largest IPO in history. And the IPO achieved everything an IPO is supposed to: it injected an ass-load of capital into the company, provided an exit for early investors at a stratospheric rate of return, and generated a shit-ton of fees for the underwriters. Nowhere in the rule book does it say anything about retail investors getting rich on the first day pop.

In fact, if you look at a deal that was patently mis-priced like LinkedIn, you'll see what I'm talking about. Morgan Stanley was behind that one, too, with the help of Bank of America. LinkedIn was priced at $45 a share and opened at $83, trading as high as $122.70 the first day. That is horrendous for both the company and the underwriters.

A mis-valuation of that scale cost LinkedIn more than $130 million - money the company could have used to survive and grow for several more years. Likewise it cost the underwriters roughly $10 million, so the $30 million in fees they split up could have been $40 million. Morgan Stanley was determined not to make that mistake again.

That Mark Zuckerberg is a genius cannot be disputed. What caught me off guard is how much business savvy this kid has, too (because the two often don't go hand-in-hand). He managed to sell a bunch of stock and get his early investors liquid at the absolute peak valuation of his company. Do you think he cares that the stock didn't pop 50%? If it had, he'd probably be calling for someone's head over at Morgan Stanley, because he's no dummy.

Will the investing public be a little more cautious and less enthusiastic about the next tech IPO? They would if they had any sense, but I haven't found that to be the case. The media hype machine will kick in and the lemmings will line up.

Incidentally, I see Facebook dropping a good 10-20% from here as soon as the underwriters cry uncle and quit backstopping it. That's even more evidence of perfect pricing. They got the absolute most the market would bear for the stock, which is what a good agent is supposed to do.

Like we used to say in the old days: The firm made money, the company made money, the clients...well, two outta three ain't bad.

Comments

SaucyBacon85's picture

Well-said Edmundo. The

CO
 
Points)
 on 5/21/12 at 7:54am

Well-said Edmundo. The clients need only look at their own greed and exuberance as FB begins its swift descent into the red.

I would caution against exalting Zuckergerg though. I very much doubt that he was in the pricing specfics...hell he didnt even turn up to most of the roadshows. And not to be a hater but I dont really think the kid is that genius...he basically just developed a format that appealed the most to social network junkies. Given the nature of the service, convergence was bound to happen. Some of the ideas he's now floating to monetize the site eg charging folks for greater status update visibility is just batshit stupid.

__________

Scott Irish's picture

The pressing question to me

O
 
Points)
 on 5/21/12 at 8:29am

The pressing question to me is why his wife looks so angry in the wedding photo, she has a look I marry billionaire scowl on her face.

Johnny Ringo's picture

Suckerberg isn't too good at

HF
 
Points)
 on 5/21/12 at 8:36am

Suckerberg isn't too good at thinking logically. Instagram for $1Billion dollar...no money making ability there. The worst mistake he has made in the past year is get F&!%ing married the day after his baby goes public and he makes 20billion,

Can Someone smack this ahole

Eventus stultorum magister.

Working9-5's picture

Got to agree on this one.

ST
(Gorilla, 614
 
Points)
 on 5/21/12 at 8:41am

Got to agree on this one. Perfect pricing and that is why I sold a truck load of those on Friday.

CNBC sucks

"This financial crisis is worse than a divorce. I've lost all my money, but the wife is still here." - Client after getting blown up

HumPiranha88's picture

Still overpriced but good for

ER
(Baboon, 129
 
Points)
 on 5/21/12 at 8:44am

Still overpriced but good for them.

West Coast rainmaker's picture

I was thinking this same

ER
(Neanderthal, 2,128
 
Points)
 on 5/21/12 at 8:53am

I was thinking this same thing...it shows that the bank did its job well. If it was up even 25% day 1, that would be proof that they left a lot of money on the table.

I don't know why investors would think IPOs are safe investments. The companies lack significant public track records, and are pricing the stock specifically to raise the most money possible.

monaco1's picture

What do you make of MS

 
Points)
 on 5/21/12 at 9:20am

What do you make of MS supporting the $38? I know it's not officially confirmed but analysts estimating this cost MS low single digit billions and if true probably wipes out advisory gains plus further expected loss as the trades unwind.

Edmundo Braverman's picture

Looks like they're done

ST
(Human, 14,705
 
Points)
 on 5/21/12 at 9:25am

Looks like they're done backstopping the deal. The stock's at $35.

Edmundo Braverman's picture

Holy shit, $34. Down 11% on

ST
(Human, 14,705
 
Points)
 on 5/21/12 at 9:29am

Holy shit, $34. Down 11% on the day. Look out below.

burnsy's picture

Uh-oh! 33.67!

 
Points)
 on 5/21/12 at 9:34am

Uh-oh! 33.67!

"All things are difficult before they are easy"
- Thomas Fuller

Oreos's picture

I think this is even more

ST
(Neanderthal, 2,563
 
Points)
 on 5/21/12 at 9:34am

I think this is even more pertinent when you take into account the voting right situation that zuck sorted for himself.

Scott Irish's picture

Wow, 33.10, this is fun to

O
 
Points)
 on 5/21/12 at 9:39am

Wow, 33.10, this is fun to watch, so for you S&T guys is this "fun" or ulcer-inducing? Guess it depends on your position.

In reply to Oreos
Edmundo Braverman's picture

Oreos: I think this is even

ST
(Human, 14,705
 
Points)
 on 5/21/12 at 9:41am
Oreos:

I think this is even more pertinent when you take into account the voting right situation that zuck sorted for himself.

He didn't retain 56% of the voting stock because he likes to play team ball.

Unforseen's picture

Every other tech co that was

(King Kong, 1,129
 
Points)
 on 5/21/12 at 9:43am

Every other tech co that was thinking of doing an IPO this year must be on suicide watch

Check out my Blog

SaucyBacon85's picture

33.66 -4.57 (-11.96%) Sweet

CO
 
Points)
 on 5/21/12 at 9:48am

33.66 -4.57 (-11.96%)

Sweet mother of....!!!!

__________

UFOinsider's picture

Is it possible that MS

O
(Human, 10,473
 
Points)
 on 5/21/12 at 9:58am

I notice that the older I am the more I sound like Illini Programer

- accountingbyday

Edmundo Braverman's picture

Actually, $38 a share was

ST
(Human, 14,705
 
Points)
 on 5/21/12 at 9:59am

torreador's picture

Zuckerberg's wedding

IB
(Monkey, 36
 
Points)
 on 5/21/12 at 10:01am
LancelotLink's picture

If MS is backstopping the

AM
 
Points)
 on 5/21/12 at 10:03am

yellow t-shirt

Edmundo Braverman's picture

Clearly they're not

ST
(Human, 14,705
 
Points)
 on 5/21/12 at 10:14am

In reply to Edmundo Braverman
UFOinsider's picture

Edmundo Braverman: I'm

O
(Human, 10,473
 
Points)
 on 5/21/12 at 10:21am

I notice that the older I am the more I sound like Illini Programer

- accountingbyday

BlackHat's picture

It was. Had to be, why would

HF
 
Points)
 on 5/21/12 at 10:42am

I hate victims who respect their executioners

Follow BH & Co. on Twitter: @DumbLuckCapital
twitter.com/DumbLuckCapital

Aldrich IV's picture

Damn Edmundo you sure got

O
(Monkey, 36
 
Points)
 on 5/21/12 at 11:29am
justin88's picture

One thing is very clear:

HF
(Gorilla, 622
 
Points)
 on 5/21/12 at 12:06pm
Gate_Crasher's picture

It was trading for years in

IB
 
Points)
 on 5/21/12 at 2:13pm
WSOusername's picture

Facebook is gonna b like

 
Points)
 on 5/21/12 at 3:40pm

GBS

In reply to GoldmanBallSachs
bfin's picture

GoldmanBallSachs: Facebook is

CF
(Neanderthal, 2,794
 
Points)
 on 5/21/12 at 4:45pm

The answer to your question is 1) network 2) get involved 3) beef up your resume 4) repeat -happypantsmcgee

WSO is not your personal search function.

the magnum's picture

Forgive my ignorance, but why

(Monkey, 55
 
Points)
 on 5/21/12 at 9:20pm
Edmundo Braverman's picture

Think of MS backstopping the

ST
(Human, 14,705
 
Points)
 on 5/21/12 at 6:24pm

recruder's picture

Thought this would be a good

ST
(Monkey, 30
 
Points)
 on 5/21/12 at 11:57pm
macro's picture

This is my understanding of

HF
(Gorilla, 555
 
Points)
 on 5/21/12 at 11:58pm
illiniPride's picture

Best priced IPO since GM.

IB
(King Kong, 1,099
 
Points)
 on 5/22/12 at 1:20am

Leadership can be defined in two words: "Follow Me"

technoviking's picture

interesting stuff guys. I saw

O
 
Points)
 on 5/22/12 at 4:38am
In reply to Edmundo Braverman
Walkerr's picture

Edmundo Braverman: If I'm

IB
(Gorilla, 573
 
Points)
 on 5/22/12 at 11:49am
Edmundo Braverman's picture

Here's a great

ST
(Human, 14,705
 
Points)
 on 5/22/12 at 11:51am

WSOusername's picture

That article pretty well

 
Points)
 on 5/22/12 at 2:52pm

GBS

monkeyc's picture

The only people who have the

(Orangutan, 340
 
Points)
 on 5/22/12 at 4:19pm
Edmundo Braverman's picture

@GoldmanBallSachs No, you

ST
(Human, 14,705
 
Points)
 on 5/22/12 at 4:58pm

In reply to technoviking
Gub_15's picture

technoviking: interesting

ST
 
Points)
 on 5/22/12 at 10:36pm
WalMartShopper's picture

I get what you're saying

 
Points)
 on 5/23/12 at 6:34pm

If the glove don't fit, you must acquit!

Edmundo Braverman's picture

No, that's very true and we

ST
(Human, 14,705
 
Points)
 on 5/23/12 at 6:44pm

In reply to Edmundo Braverman
illiniPride's picture

Edmundo Braverman: No, that's

IB
(King Kong, 1,099
 
Points)
 on 5/23/12 at 6:46pm

Leadership can be defined in two words: "Follow Me"

CoachmanMet's picture

From the sounds of it, FB ran

(Chimp, 4
 
Points)
 on 5/25/12 at 12:35pm

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