The most anticipated tech IPO since Google’s offering a decade ago, Facebook‘s going public was today called “A Perfect Storm” by the Wall Street Journal’s AllThingsD, pushing further the narrative that Facebook’s IPO was a failure. There is plenty to support the storyline– NASDAQ faced serious technical glitches to being able to fulfill all the activity, underwriters were reducing Facebook revenue forecasts during the roadshow, and two key banks on the IPO, Goldman and JP Morgan were helping hedge fund clients short Facebook stock (the horror!). Listening to the radio out here in Silicon Valley, the narrative has been that the IPO has been a disaster, in particular for the retail investor who fought to buy shares at the IPO and were expecting Facebook to surge in the first day of trading.
I see things differently.
Facebook acted in a particularly rational and concrete manner, and I think if anything should be applauded for its approach. Notably, it priced its shares high at offering. Recall that the preset range was between $28-35 per share according to a Wall Street Journal article from May 3, 2012, several days before Facebook began trading. When it came time to pricing the IPO, Facebook chose $38–22% above the mid-point of the range, and well above the $35 high-end. Facebook signaled very clearly with this pricing, that it was uninterested in providing early IPO investors with the opportunity to get a “quick pop” at the opening of trading. Investors should never buy a product at any price, and those who didn’t re-calibrate their expectations as the prices got solidified should be looking in the mirror, as opposed to blaming Facebook. In fact, there is no law guaranteeing that hot IPOs sizzle in upward price appreciation, and there shouldn’t be.
So why did Facebook set its price so high, when it could have been so easy to set it lower, get a pop and silence all this noise? I think two factors came into play. First, Facebook likely didn’t want to leave money on the table. Setting its IPO price high would yield Facebook as much cash for its balance sheet (and for pre-public investors) as possible. Second, Facebook likely reasoned that it didn’t want to attract investors looking for quick, short-term gains, but rather wanted investors focused on the long-term. Certainly this approach has been consistent with how Mark Zuckerberg has built and driven his company–with a clear focus on delayed gratification and for the longer-term. Given that that’s been Facebook’s approach over time, its totally logical that its approach towards offering its stock to the public would similarly be optimized towards longer-term focused investors. So the unsaid message from Facebook to its public investors with this pricing approach is this: “If you want to be an early investor in Facebook’s public stock, you had better be ready to hang on for a while.”
I applaud this approach for a few reasons. First, when selling its shares to the public, a firm should get as much capital as it can for its balance sheet. That is the key purpose and reason for the IPO in the first place. Second, this approach addresses one of the key problems with today’s investment environment, namely its ultra-short-term focus. From my perspective, Facebook’s behavior is spot on.
Those who should be excoriated are NASDAQ, retail brokerages who f*cked up trades for their retail clients, and retail investors who expected to make money on the initial pop.
NASDAQ has long positioned itself as the tech-centric exchange for stocks. Not anymore. The incompetent exchange is more like it, 30M shares were excuted imporperly, the largest problem the exchange has experienced. This would be like being the wedding planner for the Royal Wedding in the UK and basically screwing the whole thing up. This was something NASDAQ had to nail, and it didn’t. It will be interesting to see how they recover here. To fail this badly in this high profile an IPO is amazing. In a world where the next Facebook will have its choice of exchanges, expect NASDAQ to be playing catch-up.
The New York Times has an interesting article about how retail brokerages like Scottrade, Charles Schwab, and Fidelity have basically universally declined to take direct responsibility for losses their retail investors suffered owing to the NASDAQ’s screw up. Further, as retail investors are not members of Nasdaq, they can’t file complaints, whereas large institutions can. Instead, the retail investor whow as screwed by NASDAQ’s incompetence has a totally fugly remediation process that I can only imagine involving lots of automated phone trees with cut rate brokerages like Scottrade or Fidelty. “Dial 3 if you’d like to talk to someone about your trade… current wait times are unusually high, we expect someone to be with you in approximately 95 minutes.” Yuck.
So retail brokerages who won’t stand behind their retail customers and who offer crumby service deserve to be called out. Definitely. But there is also some accountability that retail investors have to take here. They should not come into an IPO expecting to see a quick pop. That’s lotto thinking, its not stock investing. It exposes you for a sucker and your foolishness deserves to be repaid with you losing your money. When you buy a share, you are buying a share from someone ready to sell. You need to ask yourself if you’ve really thought carefully enough about the trade you’re making, as its likely that the person or computer on the other end has dedicated a lot more brainpower to what they’re doing. If you’re ready to put your money into the market or into Facebook, you’d better understand that its a long-term game, you really shouldn’t be doing this with an eye towards what happens today, this week, this month, or frankly this year. To do so is foolish.
This tough love message is especially important now. With all that we have been through in the last 10 years–DotCom Crash, WorldCon, Enron, the banking crisis, Bernie Madoff, the housing crisis–we should have learned that you’ve got to be mindful when you invest.
To see how quickly these lessons were forgotten, and how quickly the mirage of a sure thing of Facebook’s IPO took hold of the psyche, is cautionary indeed. Fools and their money.
Disclosure: I have no investment position in Facebook. I plan to be a long-term buyer, but frankly plan to wait a little longer, as I think the price is still too high. I expect it to drift down over coming months, and will hope to pick some up.