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I recall that Facebook's first day closed at or near the offer price: Opened at $38 and closed at $38.23. That's a masterful IPO pricing accomplishment, meaning

I recall that Facebook's first day closed at or near the offer price: Opened at $38 and closed at $38.23. That's a masterful IPO pricing accomplishment, meaning, FB left $0.23 per share on the table. Moreover, the stock traded below the open for 5 quarters before starting it's impressive rise. Even with that pause, buying at the open and holding till now would have yielded nearly 27% annualized return. It's just my opinion, but ABNB missing by more than 100% ($140 close vs. $68 open) is a major fail on the part of their CFO. https://www.businessinsider.com/facebook-stock-price-ipo-6th-anniversary-2018-5 https://www.businessinsider.com/facebook-stock-price-ipo-6th...

chasedehan 6y ago
This was the second largest "money left on the table" from an IPO. Jay Ritter's document shows how much AirBNB could have picked up if they had priced their IPO appropriately. https://site.warrington.ufl.edu/ritter/files/Monnew.pdf https://site.warrington.ufl.edu/ritter/files/Monnew.pdf
- say_it_as_it_is 6y ago
  Can someone please explain the winners and losers of this $3.9 Billion discrepancy?
  - tyre 6y ago
    AirBnB is the loser; people who bought at the IPO price are the winners. Let's say a company IPOs by selling 1,000 shares at $1/share. An investor buys them all. Opening bell rings and demand let's that investor sell shares at $2/share. So the company sold 1,000 shares for half of what people were willing to pay. The investor bought shares at half the price they could sell them for.
  - lozaning 6y ago
    AirBnB is the loser because they could have gotten that money, the people who got to buy at the initial IPO price are the winners because they got those billions. This is akin to AirBNB selling dollars for 50 cents.
  - cairo140 6y ago
    Winners: The investors who bought Airbnb shares at $68 whose shares are now worth $140. Losers: Existing Airbnb shareholders who have shares in a company that could have raised $7B in cash but instead raised $3.5B. In theory, the mispricing "cost" Airbnb around 4% of its market cap, so existing common shares are worth 4% less than they should be. But there's a caveat[1]. Companies like Airbnb (no stable profit) are almost entirely valued on sentiment and expectation. Assuming perfect information and rational actors, in an alternate universe, a direct listing would have resulted in around a $146[2] share price, on top of which the company can raise a secondary listing for $3.5B without affecting the share price. They'd have the same assets and liabilities as they have today, except pocketing the difference (by limiting dilution) instead of handing it to investors. However, there's no certainty that the valuation would be $146 today had they gone this route. Humans, especially hype-powered retail investors who like to jump on flashy IPOs, are very susceptible to things like IPO bumps when making their buy or sell decisions. An entire field[3] of investing with significant buying power essentially relies on predicting sentiment. If I'm a common shareholder, sure I'm sad that my shares are worth maybe 4% less than they "should" and that the financial world pocketed the difference, but I'm probably pretty happy my shares are worth what they are and aren't too interested in, for example, rehashing the deal or picking a offering strategy that could have swayed investor sentiment in a way that made my shares worth much more than 4% less. [1] - The impact of "more perfectly" priced IPOs on market sentiment and thus public valuation is the most significant factor, but a secondary one is the practical aspect that the IPO process consists of a lot of risk, both on the part of the underwriting investment bank who gives the company the money raised in the IPO and the small number of powerful investors get access to (often) preferential pricing from the investment bank in exchange for an advanced commitment to buy the shares and hold for some agreed upon time. This illiquid market is dominated by relatively few actors. An IPOing company who doesn't "play ball" may find itself unable to find someone willing to underwrite their funding round or buy into it at all. [2] - This theoretical loss per share is computable two ways. The easy way is that they "left $3.5B on the table" which divided into Airbnb's current market cap of $84B is ~4%. The other way is the counterfactual way. Airbnb currently has 600M shares outstanding, having issued 50M shares in the IPO in exchange for $3.5B. So if not for the issuance, Airbnb is worth $80.5B with 550M shares outstanding, or $146 per share. [3] - https://en.wikipedia.org/wiki/Technical_analysis https://en.wikipedia.org/wiki/Technical_analysis
chubot 6y ago
So what happened to the Dutch Auction idea? Seems that tech is more powerful / autonomous in some ways than Wall St. now and could eliminate this risk? Why subject themselves to this process -- what are they gaining? https://money.howstuffworks.com/ipo7.htm https://money.howstuffworks.com/ipo7.htm Instead of letting the underwriter dish out shares to favored institutions, Google held a Dutch auction in which everyone who wanted a share put in a bid. The lowest successful bid became the price that everyone got their shares at, even if they bid a higher amount. This method guarantees that the initial offering price is set to sell all of the shares at a price that conservatively reflects market demand.
- spenczar5 6y ago
  The story I've seen is that retail investors, who didn't have access to the pre-IPO pricing, flooded in and sent the price way higher.
WA 6y ago
Doesn’t the market play a role as well? Back in 2013 or whenever FB IPOd, things in tech stocks were a bit less crazy than everything right now. So could they really expect it to close at $140?
mathattack 6y ago
It leaves a huge amount on the table. The only caveat is if it comes back down, initial investors would be very angry.
deleted 6y ago
[deleted]
kamilszybalski 6y ago
Do you really think that the CFO should be accountable for pricing in market hype? I would much rather under-estimate and over-perform then over-estimate and fall short. The narrative between those two scenarios is drastically different. Related. Look at Snowflake, it's trading well beyond any logic. Most retail doesn't realize that ~10% float is trading. Watch for Monday as lock-ups expire, the price action will be something.
- tc313 6y ago
  > The narrative between those two scenarios is drastically different. Who cares about the narrative unless you need to raise capital again soon? The money you get in an IPO actually goes into the business, while the trading price of the stock has no impact on the business.
  - jliptzin 6y ago
    Yea, plus people completely forget the narrative anyway after 2 weeks. No one really has any attention span whatsoever.
  - triceratops 6y ago
    Airbnb employees get paid in stock. For many it may be as much as 40% of their total compensation. If the price drops, those employees are going to be very upset. The trading price matters very much.
    - actuator 6y ago
      Only the ones who join now. I am sure the pre IPO employees are more than happy.
      - triceratops 6y ago
        Pretty sure they've been paying pre-IPO employees in RSUs for a while by now. Most late-stage companies stop paying options at a certain point. And even the pre-IPO employees will need to be paid RSUs in the future to retain them.
pfarnsworth 6y ago
This is incorrect. There needs to be large investors willing to buy at $140 in order to say the CFO failed. There likely wasn't. You can't compare the actions of "smart money" like Fidelity, etc to a small investor swept up in the speculative mania and buying 50 shares at $140. Those are the ones propping up the prices until the big money deems it safe enough to buy large volumes.
localhost 6y ago
I really wonder who all the sellers were in the IPO. In my case, were I to get allocation from my broker (I didn't) I would be subject to a 15 day holding period. Presumably the institutional investors that got the lions share of the $68 allocation weren't subject to this holding period? I read somewhere else that ABNB employees were allowed to sell 15% of their holdings at IPO? Perhaps that's where another initial set of shares that hit the open market came from?
supergirl 6y ago
it's not like they can just ask any price they want. they have to negotiate with the initial investors. if they have no investors then there is no IPO. plus, the IPO consisted of only 7% of shares right? they prob have a lot more to sell if they want, at the higher price.
justapassenger 6y ago
It's not that easy to extract all the money from IPO in a market that's in the bubble. You need institutional investors to agree. They are somehow reasonable, at least compared to what happens on the first day. Once trading starts, you'll have robinhood crowd pumping the price, without any understanding of valuation. They only know that stonks go up, so better buy early! And hedge funds that understand that behavior will also make sure to get their piece of cake.
jariel 6y ago
Their CFO did not set the price, the best bankers in the world did. Whoever they were, they were smart. There's an inherent degree of volatility in markets, there's no way to set a price.
silverlake 6y ago
Someone posted a terrific explanation for why companies are not “leaving money the table”. In short, if a fool pays $140 for 1 share of Airbnb, does that magically make the entire company worth 2X more? If I sell 1 share of my startup for $10, is my company worth $1B?
- refurb 6y ago
  Ignore the rest of the company’s shares and just look at the ones sold in the IPO. AirBnB could have gotten twice as much money for them, so of course they left money on the table.
xiaosun 6y ago
About ~10% of AirBnbs shares were offered in the IPO. So only the shares sold in the IPO "left anything on the table". The other 90% of shareholders still have the option of selling at the higher market price. Who's the say this wasn't the intended effect - the benefit to the valuation of the 90% of shares still being held is greater than the opportunity cost of the 10% shares sold in the initial IPO?
- brown9-2 6y ago
  that 90% would have had the same opportunity if the opening was higher
  - boublepop 6y ago
    If they opened higher than the market was willing to pay, the compounded effect would have been brutal, the media would have effectively declared airbnb dead on the sport with article after article contemplating exactly how they would die. And realistically that would have been the case with even a lukewarm launch, so who’s to say the net effect of leaving some money on the table for the 10% investers doesn’t overall pay itself back? The story today definitely isn’t “AirBnB is dying after covid period cuts them to the bone”.
- mikeryan 6y ago
  I know it doesn't really work this way anymore but the theoretical point of a public offering is raising capital for business operations. This represent billions in working capital that AirBNB missed out on.
- mattsoldo 6y ago
  Plus of the 10% of the shares soldo, most were to institutions with an understanding that they are going to hold it "long term" (i.e. which may be just a few months). Part of the IPO road show is for the company to select investors that believe in the company and who will be "good" shareholders.
subsubzero 6y ago
Its funny you should mention that case(fb). It was very well priced if you were facebook as you lost barely any money. I remember the headlines during 2012 were the exact opposite, it was priced way too high and there was no 1st day "pop", everyone in the media/financial group declared the IPO a flop, the stock dropped after and settled near $12 a share a few months later, from there is started its huge rise to 200+.
- divbzero 6y ago
  I remember thinking that those headlines were crazy. I disagree with much of what Facebook does but they priced their IPO right.
jl2718 6y ago
Not if they don’t need the cash. The underwriters price shares based on analysis, but the market prices shares by supply and demand. If you undersell the demand, you get a price rise, which becomes the new ‘market’ valuation. Worst case, they traded $3.5B cash for $50B in equity.

chasedehan 6y ago

This was the second largest "money left on the table" from an IPO. Jay Ritter's document shows how much AirBNB could have picked up if they had priced their IPO appropriately. https://site.warrington.ufl.edu/ritter/files/Monnew.pdf https://site.warrington.ufl.edu/ritter/files/Monnew.pdf

say_it_as_it_is 6y ago
Can someone please explain the winners and losers of this $3.9 Billion discrepancy?
- tyre 6y ago
  AirBnB is the loser; people who bought at the IPO price are the winners. Let's say a company IPOs by selling 1,000 shares at $1/share. An investor buys them all. Opening bell rings and demand let's that investor sell shares at $2/share. So the company sold 1,000 shares for half of what people were willing to pay. The investor bought shares at half the price they could sell them for.
- lozaning 6y ago
  AirBnB is the loser because they could have gotten that money, the people who got to buy at the initial IPO price are the winners because they got those billions. This is akin to AirBNB selling dollars for 50 cents.
- cairo140 6y ago
  Winners: The investors who bought Airbnb shares at $68 whose shares are now worth $140. Losers: Existing Airbnb shareholders who have shares in a company that could have raised $7B in cash but instead raised $3.5B. In theory, the mispricing "cost" Airbnb around 4% of its market cap, so existing common shares are worth 4% less than they should be. But there's a caveat[1]. Companies like Airbnb (no stable profit) are almost entirely valued on sentiment and expectation. Assuming perfect information and rational actors, in an alternate universe, a direct listing would have resulted in around a $146[2] share price, on top of which the company can raise a secondary listing for $3.5B without affecting the share price. They'd have the same assets and liabilities as they have today, except pocketing the difference (by limiting dilution) instead of handing it to investors. However, there's no certainty that the valuation would be $146 today had they gone this route. Humans, especially hype-powered retail investors who like to jump on flashy IPOs, are very susceptible to things like IPO bumps when making their buy or sell decisions. An entire field[3] of investing with significant buying power essentially relies on predicting sentiment. If I'm a common shareholder, sure I'm sad that my shares are worth maybe 4% less than they "should" and that the financial world pocketed the difference, but I'm probably pretty happy my shares are worth what they are and aren't too interested in, for example, rehashing the deal or picking a offering strategy that could have swayed investor sentiment in a way that made my shares worth much more than 4% less. [1] - The impact of "more perfectly" priced IPOs on market sentiment and thus public valuation is the most significant factor, but a secondary one is the practical aspect that the IPO process consists of a lot of risk, both on the part of the underwriting investment bank who gives the company the money raised in the IPO and the small number of powerful investors get access to (often) preferential pricing from the investment bank in exchange for an advanced commitment to buy the shares and hold for some agreed upon time. This illiquid market is dominated by relatively few actors. An IPOing company who doesn't "play ball" may find itself unable to find someone willing to underwrite their funding round or buy into it at all. [2] - This theoretical loss per share is computable two ways. The easy way is that they "left $3.5B on the table" which divided into Airbnb's current market cap of $84B is ~4%. The other way is the counterfactual way. Airbnb currently has 600M shares outstanding, having issued 50M shares in the IPO in exchange for $3.5B. So if not for the issuance, Airbnb is worth $80.5B with 550M shares outstanding, or $146 per share. [3] - https://en.wikipedia.org/wiki/Technical_analysis https://en.wikipedia.org/wiki/Technical_analysis

chubot 6y ago

So what happened to the Dutch Auction idea? Seems that tech is more powerful / autonomous in some ways than Wall St. now and could eliminate this risk? Why subject themselves to this process -- what are they gaining? https://money.howstuffworks.com/ipo7.htm https://money.howstuffworks.com/ipo7.htm Instead of letting the underwriter dish out shares to favored institutions, Google held a Dutch auction in which everyone who wanted a share put in a bid. The lowest successful bid became the price that everyone got their shares at, even if they bid a higher amount. This method guarantees that the initial offering price is set to sell all of the shares at a price that conservatively reflects market demand.

spenczar5 6y ago
The story I've seen is that retail investors, who didn't have access to the pre-IPO pricing, flooded in and sent the price way higher.

WA 6y ago

Doesn’t the market play a role as well? Back in 2013 or whenever FB IPOd, things in tech stocks were a bit less crazy than everything right now. So could they really expect it to close at $140?

mathattack 6y ago

It leaves a huge amount on the table. The only caveat is if it comes back down, initial investors would be very angry.

deleted 6y ago

[deleted]

kamilszybalski 6y ago

Do you really think that the CFO should be accountable for pricing in market hype? I would much rather under-estimate and over-perform then over-estimate and fall short. The narrative between those two scenarios is drastically different. Related. Look at Snowflake, it's trading well beyond any logic. Most retail doesn't realize that ~10% float is trading. Watch for Monday as lock-ups expire, the price action will be something.

tc313 6y ago
> The narrative between those two scenarios is drastically different. Who cares about the narrative unless you need to raise capital again soon? The money you get in an IPO actually goes into the business, while the trading price of the stock has no impact on the business.
- jliptzin 6y ago
  Yea, plus people completely forget the narrative anyway after 2 weeks. No one really has any attention span whatsoever.
- triceratops 6y ago
  Airbnb employees get paid in stock. For many it may be as much as 40% of their total compensation. If the price drops, those employees are going to be very upset. The trading price matters very much.
  - actuator 6y ago
    Only the ones who join now. I am sure the pre IPO employees are more than happy.
    - triceratops 6y ago
      Pretty sure they've been paying pre-IPO employees in RSUs for a while by now. Most late-stage companies stop paying options at a certain point. And even the pre-IPO employees will need to be paid RSUs in the future to retain them.

pfarnsworth 6y ago

This is incorrect. There needs to be large investors willing to buy at $140 in order to say the CFO failed. There likely wasn't. You can't compare the actions of "smart money" like Fidelity, etc to a small investor swept up in the speculative mania and buying 50 shares at $140. Those are the ones propping up the prices until the big money deems it safe enough to buy large volumes.

localhost 6y ago

I really wonder who all the sellers were in the IPO. In my case, were I to get allocation from my broker (I didn't) I would be subject to a 15 day holding period. Presumably the institutional investors that got the lions share of the $68 allocation weren't subject to this holding period? I read somewhere else that ABNB employees were allowed to sell 15% of their holdings at IPO? Perhaps that's where another initial set of shares that hit the open market came from?

supergirl 6y ago

it's not like they can just ask any price they want. they have to negotiate with the initial investors. if they have no investors then there is no IPO. plus, the IPO consisted of only 7% of shares right? they prob have a lot more to sell if they want, at the higher price.

justapassenger 6y ago

It's not that easy to extract all the money from IPO in a market that's in the bubble. You need institutional investors to agree. They are somehow reasonable, at least compared to what happens on the first day. Once trading starts, you'll have robinhood crowd pumping the price, without any understanding of valuation. They only know that stonks go up, so better buy early! And hedge funds that understand that behavior will also make sure to get their piece of cake.

jariel 6y ago

Their CFO did not set the price, the best bankers in the world did. Whoever they were, they were smart. There's an inherent degree of volatility in markets, there's no way to set a price.

silverlake 6y ago

Someone posted a terrific explanation for why companies are not “leaving money the table”. In short, if a fool pays $140 for 1 share of Airbnb, does that magically make the entire company worth 2X more? If I sell 1 share of my startup for $10, is my company worth $1B?

refurb 6y ago
Ignore the rest of the company’s shares and just look at the ones sold in the IPO. AirBnB could have gotten twice as much money for them, so of course they left money on the table.

xiaosun 6y ago

About ~10% of AirBnbs shares were offered in the IPO. So only the shares sold in the IPO "left anything on the table". The other 90% of shareholders still have the option of selling at the higher market price. Who's the say this wasn't the intended effect - the benefit to the valuation of the 90% of shares still being held is greater than the opportunity cost of the 10% shares sold in the initial IPO?

brown9-2 6y ago
that 90% would have had the same opportunity if the opening was higher
- boublepop 6y ago
  If they opened higher than the market was willing to pay, the compounded effect would have been brutal, the media would have effectively declared airbnb dead on the sport with article after article contemplating exactly how they would die. And realistically that would have been the case with even a lukewarm launch, so who’s to say the net effect of leaving some money on the table for the 10% investers doesn’t overall pay itself back? The story today definitely isn’t “AirBnB is dying after covid period cuts them to the bone”.
mikeryan 6y ago
I know it doesn't really work this way anymore but the theoretical point of a public offering is raising capital for business operations. This represent billions in working capital that AirBNB missed out on.
mattsoldo 6y ago
Plus of the 10% of the shares soldo, most were to institutions with an understanding that they are going to hold it "long term" (i.e. which may be just a few months). Part of the IPO road show is for the company to select investors that believe in the company and who will be "good" shareholders.

subsubzero 6y ago

Its funny you should mention that case(fb). It was very well priced if you were facebook as you lost barely any money. I remember the headlines during 2012 were the exact opposite, it was priced way too high and there was no 1st day "pop", everyone in the media/financial group declared the IPO a flop, the stock dropped after and settled near $12 a share a few months later, from there is started its huge rise to 200+.

divbzero 6y ago
I remember thinking that those headlines were crazy. I disagree with much of what Facebook does but they priced their IPO right.

jl2718 6y ago

Not if they don’t need the cash. The underwriters price shares based on analysis, but the market prices shares by supply and demand. If you undersell the demand, you get a price rise, which becomes the new ‘market’ valuation. Worst case, they traded $3.5B cash for $50B in equity.