I think Mark Zuckerberg is really smart. Kudos to him, versus all the other Tech CEOs who got duped by Wall Street.
Remember the LinkedIn IPO in May 2011? The stock offering was priced at $45, but debuted at $83 due to an early offering price spike, and closed at $94.25 the same day. However, as it usually works with IPOs, the extra $50 per share did not go into LinkedIn’s business, but rather into the pockets of the investors that signed up for the early offering. Now, if LinkedIn had been a tough negotiator, and not put too much faith into its bankers (Morgan Stanley and Bank of America Merrill Lynch) the stock offering would have been priced closer to $80, so that all that money would have gone into LinkedIn’s cashflows, accelerating their growth and expansion. NY Times Columnist Joe Nocera put it very lucidly in this article.
If we go back into the recent Tech IPO history, we see the trend repeated again and again. Yahoo offered its shares at $18 a pop in April 1996. The stocks closed that day at $33, after reaching a high of $43. Yahoo stock has since then split 5 times. If you bought a stock on the day of the IPO, it would be worth approximately $362 right now. Akamai, which saw many of my classmates get rich, debuted in October 1999 at $26 and skyrocketed to $145.2 the same day. iRobot got a valuation closer to their market price in November 2005, debuting at $24 and closing just 11% up the same day. Then there was Groupon in November 2011, which debuted at $20, and peaked at $28 the same day. See the table below for other well-know IPOs.
|Company||IPO date||Initial Stock Price ($)||Closing Stock Price ($)||Peak Price on IPO date ($)|
After some research, I came across an interesting article analyzing why IPOs so often get underpriced. There are some viable theories in there. Not sure if I agree with all of them. What do you think?
Mark Zuckerberg, on the other hand, succeeded in pricing Facebook at or near the highest price shareholders were willing to give. And we did see the stock price rise up to $45 before it began its descent. Because of Mark’s tough negotiations, Facebook managed to raise $16 billion to invest in its business, rather than the $11.8 billion it would have raised at the initially talked about $28 price. Thankfully, that is $4.2 billion that went into developing a product and way of life that we all love or love to hate, instead of the deep pockets of the bankers on Wall Street. And yes, there are probably many small time or amateur investors who may have also lost money in this IPO, but, seriously, they should have either done their homework before buying the stock, or, if they believe in the eventual success of Facebook, shouldn’t have sold their shares at a loss, and instead waited out this slump. And if you used a hefty leverage in the hope to make a quick fortune from the Facebook pop, and instead made a hefty loss due to margin call, you have no one to blame but yourself. I mean, seriously, can you believe the investors in this article.