[The article was updated at 12:20 pm on 5/16/12.]
Prom night is almost here for Facebook and its suitors. Here’s a program to the biggest high technology initial public offering ever, and what you should know:
It’s too late to buy tickets. Sorry. If it took you this long to decide on whether or not you’re in love, you missed out. Of course, you can buy after the IPO is priced, but that may cost you (see “The first day pop” below).
The deal is hot. How hot? Tuesday, CNBC says that Facebook will be filing to bump the size of the deal up 25% to about 420 million shares — swelling it to as much as $18.5 billion. That follows Monday’s news that the underwriters were raising the price range from $28-$34 to $34-$38. No doubt they will get it. Senior citizens want in, says CNN Money. One dad is betting his kids’ college fund on Facebook, the Wall Street Journal reports. Last week I heard that institutional demand was 20x oversubscribed. Yesterday the New York Times reported that in Japan the deal was 25x oversubscribed.
There’s an anti-prom in full blossom. Felix Salmon over at Reuters says he’s skeptical about the supposed demand; he just doesn’t see it. So he ran an unscientific poll that asked if respondents were planning on buying Facebook, knew anyone who was, or were going to skip it. Seventy-five percent planned to skip it.
Meanwhile, many eyes are taking a hard look at the hard numbers. If the deal prices at the high end of the range, the company will be worth more than $100 billion — more than Boeing, for example, which employs about 50 times as many people. Facebook revenues were just $3.7 billion last year, and depending who you ask aren’t likely to be much more than $6 billion this year. At this kind of valuation, investors are putting Facebook on a high wire without a net. An ill wind from Europe, or more bad news on advertising revenues, could send the Facebook shares tumbling once they are free to trade. And the company may not be able to shrug off news, as it did yesterday, that a big name like GM is pulling its ads from Facebook.
Business Insider founder Henry Blodget went so far as to call the Facebook shares “Muppet bait.” Like many high tech analysts, he wrote back in February that the deal was probably fairly valued at approximately $70 billion. At $100 million, he says, not so much. Sam Hamadeh at PrivCo, a company that specializes in researching private companies, similarly says the risk-reward ratio is out of whack. He’s issued a new report just this morning which values the stock at about $24-$25/share.
Insiders are selling. And now the Wall Street Journal is reporting that the 83 million additional shares that Facebook just filed to sell are coming from Goldman Sachs, which is now selling as much as 50% of its stake, up from 23%. Other big name sellers include DST Global, the Russian investor, investor Peter Thiel, and Accel Partners. (The Journal has a complete list here.) This suggests that these professional investors don’t think there’s a lot of upside, especially with the IPO price having been bumped up.
On the other hand, the Google IPO had skeptics, too. The negativity sounds familiar to a number of analysts who have been around the high-tech IPO block more than once or twice. Lou Kerner, founder of the Social Internet Fund, recalls that just before the Google IPO priced, sentiment turned negative. The roadshow was a letdown. But it worked out okay.
David Kirkpatrick, author of The Facebook Effect, says the naysayers are missing the big picture. In a radio interview with CBC radio Tuesday, he argued that the social media company is nothing short of a global passion. Despite some disappointments in Facebook’s first quarter results, he sees huge growth ahead. Two billion users? No problem.
Also worth remembering: In February and March Facebook traded in the private markets, playground for institutions and high net worth individuals, at prices between $36 and $45. Aren’t those the sophisticated investors with an inside track on good deals? But then, more insiders are selling now that the deal price is inching higher.
The first day pop. However this all shakes out in the long run, chances are the share price will — initially, at least — rise. The reason? With IPOs, the company and its underwriters agree on one price and then distribute the shares to clients the night before they begin trading. Once the stock begins trading — in this case on the Nasdaq under the ticker symbol FB — anyone can buy and sell shares at any agreed on price. It could be $20. It could be $50. Or $80. This phenomenon tends to have little relation to the market’s long-term view of the stock, and as a result many investors worry that the price of Facebook could surge on the first day or two of trading and then stall — or even slip below the initial offering price. That’s what happened with the Groupon and Zynga IPOs, as well as with LinkedIn, though LinkedIn has since recovered. This is why IPOs are generally seen as an insider’s game — those fortunate to have gotten their hands on shares at the initial offering price have the option of selling them on the open market during the initial free-for-all, before reality sets in.
Facebook is bigger than Facebook. As with Google and Apple, the reaction to Facebook is likely to resonate throughout the market. As the standard bearer of the economic power of social media, it could buoy the broader market. But if Facebook traps naive investors with some ill-thought-out trades, it could bring despair and hopelessness to the stock market – and just when the individual investor are finally feeling confident enough to wade back into the stock market.
That would be bitterly ironic. Facebook has made it clear that it wants individual investors to be a part of this deal. After all, where would the company be without all 901 million of them?