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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.
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.
The only people hurt by the initial overvaluation were the people that bought high. Everybody else wins or is neutral. Everybody. Again, unless the market starts caring about retribution and undervalues them. Otherwise everybody gets exactly what the market will give them.
The ibanks, Zuckerburg, and initial investors that sold on IPO day or shortly after, all win by a huge margin. They pulled the wool over lots of people's eyes; perhaps not intentionally, perhaps they honestly believed their own bullshit, but in any case their irrational exuberance hurt them not one bit.
Except the employees would have been sacrificing a higher salary for these shares so they where hardly free.
> The only people hurt by the initial over valuation were the people that bought high
The people that got burnt where those that read the IPO document and assumed it was not a work of fiction. The people that made money where insider trading on information not yet public.
The others that will get hurt are the next set of companies that try to float. The market will be reluctant to make the same mistake again.
Bad IPOs damage the credibility of the market and dmaage the ability of companies to float and that Facebook IPO was just a joke.
Anyone hired after their valuation was fairly high who was given options would be given options with a high strike price. If the stock never gets there, those options are worth nothing.
A large part of the people who were hired in the last year, with apparently generous option packages, now have Facebook on the resume and no golden handcuffs holding them. And a lot of other employees who had golden handcuffs are going to be thinking about places to bail. This could give them a significant retention problem.
I continue to disagree with you about this fucking Zuckerberg/Employees etc. They have turned paper money into real money. They have lost - psychologically - some unreal money in their freeze period (BTW I was not aware of this, I am much more familiar with Australian securities law). The ~70 Billion of shares from outside investors (Guestimate, I don't know how much stock was retained by employees) - has capitalised the company however, and these are the people who are getting b*tchsplapped by the invisible hand.
With regard to IPO as you are preparing to grow - yes. But that just highlights the nature of IPOs in a bubble. As another poster said, they have managed to significantly capitalise the company despite the fact that rational investors have subsequently brought the share price back to something that (they consider) is more properly the fair value. the idea that a shareprice should skyrocket post IPO is a fallacy that goes against the Efficient Market Hypothesis - i.e. that in the long run you can't achieve returns that are greater than the average market return. This same fallacy is what most 'uninformed' investors are investing in the market under - and it is the existence of these investors that allows informed investors to make a killing on their behalf - in this case, Merrill (and assumably lots of others) by shorting the stock.
However Morgans would have made a double killing in the post-ipo period having oversold the allocation and now being able to fill those orders cheaply on the secondary market (assuming they didn't issue new stock to fill the orders)
http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stan...
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.
BTW, IPOs have been in long term decline (in terms of absolute numbers) for ~20 years now - see the economist
I will agree, however, that the biggest winner is and probably always will be the investment bank. Well . . . sometimes the bank loses, but not very often if they do their job right.
That being said, I agree with your article and you make lots of good points!
If they were given options which the employees had to pay $25 to exercise, then yes, the employees lost money. However, they had the same opportunity to make the analysis that any other investor had. No one forced them to exercise their options, and those who did paid too much.
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.
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?
"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?
It's actually the valuation I care about vs. the stock price, but people tend to understand that better, so I use that as a unit instead of valuation.
The bottom line is yes, I write pointed, and passionately, I'm not personally at a loss for FB, I'm just tired of hearing "expert opinions" even on Bloomberg.
So your frustration is with blogs, written by people who are paid in proportion to how angry or scared they make their readers, using Facebook as a stalking horse to drive page views? I can certainly understand if that is the case, why not say that?
Instead you said this : "The root of this problem is core to the DNA of Silicon Valley types. "
You didn't say the people who blog about Silicon valley (heck they may not even live here) you just said "Silicon Valley Types" which covers a lot of people, many of whom like the folks who founded Y-Combinator probably don't think of themselves a collective that "These character flaws are why we (the collective known as Silicon Valley) thought that a company with piss-poor revenues could IPO at an overpriced valuation, and have the same fan fare for over-valuation as it did in the valley. "
You impeach yourself by calling Facebook's revenue 'piss poor', it isn't, and then accuse "us", those who live in Silicon valley, with 'over valuing' when in fact that was the work of a collection of banks, based primarily in New York city.
I would love to hear passionate, pointed, editorial about how bankers and journalists unknowingly (or perhaps knowingly if you are the conspiracy type) in the creation of a value perception, but its a hard case to make here. There were literally years of trades in FB you could look at from SecondMarket, and there are a number of pretty cogently written analyses of their business model and the potential of their business. The Techcrunch whine about how it's not the bubble they were hoping for, and were so sure it was, will pass. And a lot of young people who weren't here for the dot com fiasco (or at least they weren't watching it closely) could learn from clear insights about what really makes a company worth a billion dollars to investors, or worth a hundred billion.
You could do that instead, start from what you care about and bring us along as readers, telling us why you care and perhaps educating us as to why we might want to care as well. That may or may not be effective, but it certainly would be less snarky I expect.
