Facebook’s IPO seemed like a sure thing only a short time ago. This iconic leader in the technology space led by a charismatic CEO seemed destined to have a blockbuster IPO. The IPO encountered a number of substantial problems and challenges, however, and the stock’s post-IPO performance has been far less than stellar, with none of the big increase in the stock price that was widely anticipated. This IPO is now widely viewed as flawed and as a failure in many respects.
After three full trading days, Facebook’s shares are trading about 16% below the IPO price. The stock closed slightly above its IPO price on its first day of trading, but this only happened because the underwriters bought enough shares to support the stock. A variety of problems contributed to this poor debut, including the sale of large blocks of stock by existing Facebook shareholders, General Motors’ last minute decision to curtail substantial advertising on Facebook, a negative assessment of Facebook’s second quarter revenue forecast by analysts for the lead underwriter (which was allegedly only shared with potential large institutional purchasers), strange technical glitches at NASDAQ and the underwriters’ decision to increase both the number of shares sold and the offering price. Facebook’s final IPO prospectus can be found here.
The stock’s performance suggests that the underwriters’ original valuation ($34 per share) was only slightly higher than the company’s valuation as perceived by investors. The decision to take the IPO price to $38 per share increased the valuation beyond this perceived fair value. The subsequent decline in the stock value has taken the stock price down to a level that the market perceives is reasonable.
While Facebook’s current and prospective problems are daunting, the company was able to raise a huge amount of money at a premium to its actual value, so the IPO transaction was beneficial to the company. This is understandable given the tremendous demand for the stock that existed prior to the IPO, even in light of the problems that existed. The post-IPO results so far, while disappointing when compared to other technology IPOs, are short term and will correct themselves if the company increases its value. I’m actually surprised that the IPO price was as low as it was given the extremely high profile of this offering, but the significant negative factors that surrounded the offering contributed to this. In any case the company’s final valuation was still a huge multiple of historical earnings.
Facebook is clearly facing some significant problems. Investigations by the Securities and Exchange Commission and the Financial Industry Regulatory Authority may occur, and at least one class action lawsuit has been filed against the company. Chairman Shapiro of the SEC raised concern about the problems surrounding the company’s IPO, saying that “there are issues that we need to look at specifically with respect to Facebook.” Richard Ketchum, Chairman and CEO of FINRA, said that the communications by underwriters to some prospective purchasers of concerns about Facebook’s revenues “may be a matter of regulatory concern”. While no definite regulatory proceedings have yet commenced, this is clearly not a good situation for Facebook or the underwriters.
Facebook’s IPO and its market performance so far have been much more conventional than anticipated – true value rather than hype and buzz have largely controlled the process. This may be positive for technology companies which may be contemplating IPOs. Observers believe that the next wave of technology IPO’s may involve enterprise software companies such as Splunk, Workday and Atlassian. These companies have actual products that generate sales, and it could be extremely powerful if these companies have their IPOs priced close to their true value without hype or hysteria. This could lead to an entire new generation of strong, powerful public technology companies that are built on actual business performance, and it could set the mold for how technology IPO’s will be conducted. It will probably become more difficult to conduct a technology IPO, however, since fallout from the Facebook situation may spill over into subsequent technology IPOs.
While it’s difficult for some to acknowledge, the failure of Facebook’s stock to generate a significant increase in the stock price following the IPO may be a good thing. Several high profile technology stocks have experienced a strong post-IPO stock price increase only to have the stock price decline significantly soon after. Facebook is starting life as a public company with its stock at a relatively fair price based on investors’ expectations. What happens next will depend on how well the company executes its strategic and tactical plans. The market will be quick to reward Facebook if the company is able to demonstrate increases in its value.
Facebook’s CEO, Mark Zuckerberg, will be forced to demonstrate that both he and the company are capable of successfully operating within the public company context. Zuckerberg retains voting control over Facebook even after the IPO, so he will continue to have a very significant role in the company’s strategy and tactics. He has been criticized for operating the company without significant input from other sources (such as the Facebook board of directors), most recently in connection with Facebook’s $1 billion acquisition of Instagram.
From a market perspective the Facebook IPO process worked largely as it should. I have substantial faith in Facebook and its future success, but the company is going to have to demonstrate to the markets and investors that it deserves to have a higher stock price. Forget the hype and hysteria – the company has to produce now. Isn’t this how it’s supposed to work?