Facebook IPO Fail?

This is really starting to bug me. Nearly a week after Facebook’s IPO and the papers are still saying that it was a failure. It wasn’t, or at least, whether or not is was depends on who you are. And I suspect you prefer the winner to the so-called losers.

Let’s start with the basics. What is an IPO? It’s simple: a company sells a part of itself in exchange for cash. In the physical world, that’s the same as me making something and selling it to you. For the sake of this example, let’s say that I sell it to you for 1.

And what’s the share price? Well, once the IPO has completed, someone else can buy a share from you. The share price is basically just the price that you can agree on. Maybe you could sell it for 1.20. In this scenario, you just made 20%. Well done you.

And what about me? Well, I’ve made nothing more.

Let’s apply that back to Facebook. The initial price was $38. That’s the amount that Facebook got for each share. Let’s say that, as many expected, the share price rocketed to $50. Who benefits? From my example above, it should be clear that it would mostly be the people who bought the shares. The banks, the speculators. In short: not Facebook.

It doesn’t take a lot of thought to realise why the share price would rise so rapidly on the first day. Is it because the value of the stock increases rapidly in only a few hours? Or is it because the stock was originally underpriced? Contrary to what you read in a lot of papers, a rapid rise on the day of the IPO really means that the banks did a poor job of pricing the shares and that the company made far less money than they should have.

(To be clear, Facebook benefits from having a higher share price over time. I’m just talking here about the price rocketing on day one.)

Facebook wanted to get the most money possible out of the shares that they were offering. It turns out that the did an excellent job. They sold them for $38 and by the end of the day the market pretty much agreed. They left very little money on the table.

So unless you feel sorry for the banks or the speculators who failed to make a quick buck, the Facebook IPO was actually pretty successful.