For months, the investment banking world has been abuzz with speculation and sound bites on the biggest IPO of the year, if not the decade: Facebook. Here’s how things went wrong.
How IPOs Work
Companies that wish to expand need cash. The initial public offering, or IPO, lets investors purchase a stake in a company that may needs funds for buying equipment, opening a new plant or hiring workers. Investors purchase stock shares that they can buy and sell at (almost) any time. The stock price rises and falls as demand dictates. When an investor sells stock the difference between where he originally bought it and where he sold it is his profit (or loss).
All kinds of companies “go public.” Wall Street treats companies that produce goods (such as auto makers like Ford or display solutions companies like Vispronet flag) and services (Facebook) equally. If your company makes money, or it has a great business model or idea, chances are you can find an investor.
The Facebook Debacle
Every company that wants to issue stock hires an investment banking underwriter to put the deal together, a rigorous, difficult and lengthy process. Facebook hired Morgan Stanley to run the deal, a premier Wall Street firm with decades of profitable history and experience. Morgan Stanley announced an initial price of $38 and set the first day of trading for Friday, May 18. Investors lucky enough to participate in the initial offering – the deal was oversubscribed, meaning that there were more interested investors than available shares – expected a quick and steep return. Many IPOs return as much as 30 percent on their first day of trading.
Except…the price went down. And now Facebook and Morgan Stanley are the subject of at least one investigation and one lawsuit. The good news – for retail investors anyway (that’s Wall Street speak for the average Joe on Main Street who’s beefing up his IRA) – is that Facebook at below-offering prices may turn out to be the deal of the century.
Usually, the lead investment banking underwriter – Morgan Stanley in Facebook’s case – “supports” the stock following the offering by providing a steady stream of buyers who push the price up. Google, for example, opened in 2004 at $85 per share and closed its first day at roughly $100 per share. Apple and Microsoft performed well on their first days, too.
However, allegations surfaced that Morgan Stanley alerted certain key personnel and clients before the deal opened that the company’s financial future may not be as rosy as originally thought. The stock sank, and just a few days after the deal opened the stock (FB on the NASDAQ) trades at or near $32 per share.
Can Facebook Make Money?
These allegations and complaints will all become moot if Mark Zuckerberg, Facebook’s co-founder and leader, figures out how to make money from the site, which currently reports declining revenue. Will he keep his pledge to keep Facebook free for all users? Will businesses reap the advantage of the friendly user interface? Can he accomplish these tasks before a competitor comes along with an even better social network? How soon can he get Facebook profitable, and how much will that affect the stock price?
If Facebook successfully addresses these issues, $32 per share will be the deal of the century. If it can’t, then it may go the way of Netscape—into the world of technology oblivion.
Guest blogger Michelle does not own stock in Facebook, but she does enjoy blogging about everything from Wall Street IPOS to how a Vispronet flag will help increase your business’s visibility.