Earlier this week one of my lecturers asked the class if they knew about the Facebook Initial Public Offering fiasco. I certainly don’t think that it was a fiasco, and in my view Mark Zuckerberg, Facebook’s chairman and CEO, made a brilliant, although risky, manoeuvre.
There were a few things that went wrong prior to, and on the day, of the IPO.
- Facebook warned that they would not meet their Q2 revenue forecast and had repeatedly said in it’s IPO filings about he challenges they were facing with mobile advertising. Morgan Stanley, the lead underwriter, and other analysts, lowered the earning’s expectations, but warned only a few investors.
- Facebook increased the number of shares being offered by 25% just prior to the IPO. Considering that the prices of the shares might have already been over-valued, this was pretty risky, but the worst part was that the shares were not coming from the company but from shareholders selling their shares; this was not a good sign as it showed that people were cashing out.
- The NASDAQ stock exchange that Facebook decided to list on suffered a glitch on the morning of the IPO, which delayed the start of trading of Facebook shares by 30 minutes. There was some confusion on whether people owned the stock or what was going on, which went on for the rest of the day.
- The shares of Facebook has since plunged to about US$28 at time of writing, or by 26% of the original US$38 IPO price.
- Facebook gained US$16 Billion cash from that IPO, regardless of what the share price is now. Zuckerberg could have stated the IPO price at the reasonable US$28 that would have given Facebook far less capital, or he could go all in could win big time. This was a gamble that paid off well. Yes the investors might have gotten the ‘pop’ that they wanted, but this is really about Facebook and not the investors.
- Facebook is using this cash from the IPO for strategic acquisitions. Remember that Facebook is weak in mobile and needs to make in-roads into that segment, and do so quickly. It’s important to note that the IPO cash has been reinvested into strategic missions and not for other gain (at least I think so).
- The share price has since been stable at about US$28, which is what the real value might be (unofficial pre-IPO surveys had the price at US$25), so the downward trend has stopped for now.
To me, I don’t think that Facebook or Mark Zuckerberg did too badly. I am not going to comment on the merits of the business that Facebook is in, but I do think that it’s a stock that will do well. Facebook continues to innovate and change, sometimes much to the annoyance to their users, but it shows that they are willing to change to keep things fresh – which is important in the world today.