IPO Pricing 101
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.