*" Unless fraud is shown, MS did absolutely nothing wrong. "
* " Maybe I’m just cynical but how could anyone who wasn’t an insider expect to make any money on this stock trading at 80x earnings"
Totally agree. It is pure greed and speculative investment…
Just like ny scheme offering more than 20% return is bound to flop (turn to be fraud one day) the fundamentals did not simply agree with the hype…
Rightly said: 'pigs get slaughtered’ , CFa theory or no theory!!
Going back to the pricing issue…MS actually has conflicting responsibilities. They need to raise as much money for their client (FB) as possible and therefore try to get the highest IPO price possible. But, they also have a duty to their investors. If MS prices an IPO too high, initial investors lose money and they won’t trust MS to price an IPO fairly in the future.
A successful IPO should go up 5-15% in the secondary market. If it goes up more, then the company going public got screwed. If it goes down or remains flat the initial investors get screwed.
Make no mistake about it, this was a huge failure for MS.
Let me put it this way. I don’t buy IPOs, there’s a supply / demand dynamic there that I simply don’t have the market savvy to accurately guage. But my Dad, who’s not some major heavy weight investor called me about a week before the IPO saying his broker asked him if he’d like shares if their podunk brokerage got some. I asked my Dad how many IPO’s he’s had access to before, and pointed out that if it was worth a crap and the demand was there he wouldn’t be getting a call. So he declined.
I don’t think MS did anything wrong. I think investors are stupid. I do think they hurt some of their placement ability by alienating some investors, but because people were reaching so far down the retail chain to place this junk, I don’t think they alienated many of their key heavyweights who probably declined. So the damage may not be as bad as it seems.
who told you an IPO should go up 5-15% that is just stupid…so basically there is free money to be made by that logic…ppl who think that way are problably long IPOs…
I said for an IPO to be deemed successful it should go up 5-15% on the first day. That’s not my opinion, that’s historical IPO performance. Investors that participate in IPOs expect to be rewarded. There’s additional risk of being first in line to a buffet, so expected returns go up. Why would anyone participate in an IPO that wasn’t expected to go up? Put another way, it would be much harder to take companies public if IPOs generally fell in value on the first day of trading. Everyone would wait to buy in the secondary market and never buy the IPO.
But, it’s not like MS could have priced FB at $15 just to ensure a 100% one day gain. Then they would have screwed FB out of billions. The trick for any investment bank is to price it so the initial investors get rewarded for their participation, and that their client is getting the most out of going public. It’s a balancing act.
As we’re seeing with FB, it’s not always free money. But, there is a reason brokers only allocate portions of the IPO to their best clients. Not free money, but generally a good bet.
This is a good post. One thing I wanted to add:
People are calling the facebook IPO a blunder. I doubt it was a blunder at all. Usually, the investment bank would try to create value for both sets of clients, as Sweep indicated. But it’s possible that the investment bank might decide to completely hose its retail / private clients in favor of the investment banking client IF the investment banking client’s IPO was so large and lucrative (and so high profile) that the incentive structure became skewed. The facebook IPO wasn’t as lucrative as it could have been based on the fee structure, but there is a follow on effect (or should have been) from other tech companies wanting to use MS to go public, so it should have been VERY lucractive for MS on a NPV basis. It’s very possible that the senior tech bankers / management of MS sat around and said, “Yeah, let’s stuff this crap down our investors’ throats any way we can to maximize this for facebook” because they figured that would maximize MS’s own value. In fact, I think that is probably likely. If they lose some smaller customers on the other side of the trade, no biggie, those people turn over anyway and can be replaced. You can’t replace a facebook though, and it’s hard to replace any future lucrative tech IPOs you get as a result of having been the lead underwriter on facebook (which may now be in question given the media coverage but probably seemed like a great point at the time). Not a blunder.
my mistake…
If you bought yesterday morning, FB is great stock so far.
Yeah, it doesn’t suck yet. Give it time.
MS wouldn’t have been buying shares like crazy in an effort to support the IPO price if they didn’t view it as a blunder to have the price drop below $38.
NASDAQ screwed up badly too. FB is already looking to delist and move to the NYSE. It was just a botched job from the start.
Looking forward, if a company is being valued at 80x forward earnings, you’ve got to expect some huge growth. Exponential growth. Not just in users…that really doesn’t matter. I’m not sure they can monetize the ones they have. I think we’ll see FB trading around 45x forward earnings in a couple quarters. That’ll still be too high.
25 in the next 3 weeks
This makes me very worried for FB:
The high and low of your range is 5% and 15% respectively. Most people will look at this range and say “Makes, sense the range is only a 10% spread.” I look at your range and say “Wow, the difference between the low and high is 200%” which is astronomical. It’s really not too hard to hit a target when you have a range of 200% from the low to high.
Where are you getting these numbers from? Are you looking at historical performance which is going to be skewed because of the 90s? The IPO market is a fraction today of what it used to be.
Interestingly back in ~2000/01 the head of equitites where I worked had me take one of the portfolios which had terrible performance and recalculate all risk numbers with the effect of IPO performance taken out. Back then IPOs (off the top of my head) were doing minimum 20% and more.
No doubt the average first day IPO pop is skewed because of Pets.com et al. Prior to FB’s first day I was hoping people had more realistic expectations about big name IPOs. Now I know they do. Still, 10-15% is pretty average. See link below.
Obviously there’s no rule that states what the first day performance must be to please everyone. But, from discussions I’ve had and what I’ve read, anything under 5% and investors aren’t pleased and anything over 15% and the company going public isn’t pleased.
In theory, FB should be happy with MS for getting so much money out of investors. They shouldn’t care what it does in the secondary market. But, in reality, it damages their ego. Everyone wants to see a nice pop on the first day.
http://www.renaissancecapital.com/ipohome/press/iporeturns.aspx
Edit: And while that range may seem big to you, put yourself in the investment bank’s position. Would you really feel confident you could price an offering that would end the day in a tighter range? I think 5-15% is still a tough mark to hit.
Saying it’s a 200% range is the wrong way to look at it because you’re assuming that the asset has a fixed and knowable price that can be derived by having inside information the bankers would have. The reality is that few assets have an exact, objectively determinable price. Most assets have a range of fair value and the range can be significant. Microcaps often trade at a 20-30% discount to “fair value.” Growth stocks can trade substantially above fair value. The fact that a purely objective, 100% “fair” price for an asset cannot be derived is what makes markets.
For something as unproven and fast growing as facebook, if they can peg it within 10% of some well developed fair value estimate based on the best (inside) numbers available, that’s a pretty damn good job. I’m not saying the price is fair by the way, just that no one should be held accountable for trying to price any IPO down to the penny or some arbitrarily low percentage range like, say, 3%.
^^^Incorrect.
Moving on ------->
STL, back then Barra added a factor to their model because the traditional model could not attribute what was going on in the tech markets. I believe it was called Tech or something. It wasn’t an industry, it was a factor. Now that factor is tested to be worthless and is no longer included (been a while, I can’t remember 100%). So, if you tested IPO return then against what it is now, I’m sure it would test differently and significantly smaller.
I think Bromion is referring to the fact that if ‘They try to get within 1% and 3%’ that would make the difference between the low and high 300%
That tech factor is interesting though
@Blake - I see where you’re coming from and don’t really disagree. But, I’m not sure what your point is. Are you just hung up on the top end of my range? If you want to call a 3-6% first day pop successful, that’s just semantics as far as I’m concerned. My main point is an IPO needs to go up, but just not too much.
@ STL - Respect.