Facebook’s IPO a Flop?

I was very surprised as were others that Facebook didn’t experience the first day pop that is often the case with hyped up IPO’s, especially in technology, but there are many variables to consider.  First, the insiders floated almost 15% of the stock (85% still remains with the insiders), which is quite large relative to the single digit float percent of other social media and networking companies that went public in 2011 and 2012.  The overall stock market has also been in a free fall for the last several weeks as fears of the Euro-zone increase.  And, Facebook’s underwriters priced the stock at the high-end of the company’s current valuation projection which many consider insane (including me).  Finally, the NASDAQ stock exchange apparently failed to handle the swell of demand for the stock…OOOPS!

I will be very interested to see what happens to Facebook’s stock next week as the NASDAQ fixes their glitches and the professional and public investors have the weekend to think about their investment or potential investment in Facebook.  But for now, and assuming the stock doesn’t spike next week or rise in the future, I can say there were a few winners that cashed in on the initial day of trading based on valuing the company at over $100 billion.  First and foremost, Facebook (“the company”) was a big winner given the offer price was very close to the final trade price on the initial day of trading.  Basically, this means Facebook (“the company”) maximized its funds from the IPO.  Believe it or not, a huge first day pop isn’t a good thing for “the company” as it means the company lost potential funds by not pricing the initial offer price at a higher range.  Here is an article that supports my position that Facebook (“the company”) has a successful IPO.  Facebook now has a $6 billion dollar war chest to continue with its scheme to siphon money away from its users into the hands of the marketing and advertising machine.

There were also some other winners if the stock price never goes above $38 bucks in the future.  The insiders that decided to dump a large portion of their pre-IPO stock at $38 bucks per share hauled in $9.2 billion dollars.  Most of these insiders invested far less than they earned by selling their private shares at $38 bucks.  Other potential winners are the huge clients (high wealth individuals or hedge funds) of the underwriters that got first crack at owning the stock at $38 bucks per share.  The stock price hit a high of $45 bucks before massive selling drove it down towards $38 bucks.  These huge clients of the underwriters were able to make quick gains if they dumped the stock at $45 to $43 bucks.  But, I am certain that these large clients are less than pleased for they would have rather started flipping or dumping the stock at a price of $50 or $60 or $70 bucks per share.  But the first day pop failed to materialize.  Too bad….ha ha.  Last but not least, all the underwriters are winners.  They make millions off every IPO regardless of the outcome.  Way to go Goldman, Morgan Stanley, J.P. Morgan, and the 28 other underwriters.  Nice job.

It is yet to be determined if the insiders still holding significant amounts of Facebook Stock (for example Zuckerberg that is currently worth $20.5 billion on paper) and new investors that bought and held shares on the initial day of trading are winners or losers.  I say losers, but in Zuckerberg’s case even a stock price of $12 bucks would make him pretty rich.

I think it is very important to note that the stock price might have fallen below the initial $38 bucks, but apparently the underwriters stepped in to buy large amounts of the stock to prevent it from falling below $38 bucks (Underwriters Step in to Support Stock Price). That isn’t a good sign.  But, again, we will have to wait until next week to see what happens to the stock in order to really get a feel for what is going on.  I have to say that it is a little discomforting that the same guys underwriting the stock (Morgan Stanley and Goldman Sachs for example) can also influence the stock price once it goes public.  I realize anyone has the right to buy stock once public, but it doesn’t seem to fit with spirit of free and open markets when those setting the price can also influence the price through massive purchases or liquidations.

There are two other strong points I want to make.  First, I think it is important to note that Facebook (“the company”) raised less money from the IPO than the insiders siphoned into their own personal bank accounts.  This is a theme that runs rampant through the IPO process to such an extent that I believe the IPO process is no longer about raising money for “the company”, but for siphoning money into insiders personal bank accounts.  Insiders hauled in $9.2 billion while Facebook (“the company”) received just $6.8 billion (Breakdown of $16 billion IPO).  Unless there is a secondary offering, the amount of money insiders will make post lock-up period from the IPO process (assuming the social network/media sector doesn’t collapse) will make that $6.8 billion look rather modest in comparison.  The other interesting point is that the social networking/media sector as a whole took a major hit today as Facebook’s IPO didn’t experience the expected first day spike relative to the offering price.  In fact, the NASDAQ had to stop trading Zynga because so many investors were dumping the stock.  The other social media and networking “playas” that I am following on this blog took hits including YELP, LinkedIn, and Groupon.  I was expecting Facebook to lift these stocks up once it went public, but the exact opposite occurred.

Given Facebook’s IPO is perceived by the general populace as a flop, the pressure will all fall on the management teams and founders in charge of these social media and networking companies to deliver performance to justify original IPO valuations.  And, given the general economic climate is less than ideal, advertising and marketing via these social networking and media channels may experience severe obstacles.  The first cuts companies implement when the economy gets tough are ineffective or marginal advertising/marketing channels.  Facebook may have a rough time trying to “monetize” (or help Facebook’s real customers suck money away from Facebook’s  secondary customers) its user base.

Cashing in on a bubble is a race against lock-up periods and perceived company performance into the future.  The economic climate is working against this social networking bubble and its syndicate of greedy legalized crooks.  I will be following the insiders of all these social media and networking companies to analyze their inside trades as lock-up periods expire.   Will they hold their precious pre-IPO shares into the future and tough out a challenging economy, or will they start dumping them like a load of bricks?  This potential bubble may never get enough air to float to great heights if the Euro-zone triggers another economic downturn and the United States can’t get the engine re-started.  Although the same crooks behind the social networking and media bubble are responsible for the poor economy, perhaps even they may feel a little pain (all relative of course) from their past Ponzi and bubble schemes.  What goes around comes around.  You can only go to the well so many times before it dries up.

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About Tincup

Musings on the Human Momentum and thinking about what that means to you and I and future generations.
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