5 ms·

I feel like this article misses a number of points. Firstly, the modern IPO is chiefly about giving early investors and staff an exit ticket. It is therefore in

by robbiep 14y ago

I feel like this article misses a number of points. Firstly, the modern IPO is chiefly about giving early investors and staff an exit ticket. It is therefore in their interests to price it as high as possible. The fact that there was significant hype around the business meant that they were able to achieve this valuation. The fact that this is distinct from the original aim of the sharemarket - that is, capitalising firms to create new ventures (Think infrastructure - the golden age of rail, factories, etc) is an interesting side-note. Secondly, the marketplace often operates on the stupidity of the masses. Intelligent fund managers stay away from overpriced IPOs, the uninformed masses pile in because they hear the hype and are not value investors so don't know/care that the revenues aren't behind the company. 3- A successful IPO is one that is fully capitalised and gives the company new cash. It is not one that goes through the roof. This would represent a failure of the Merchant Bank to properly capitalise on the company's value (They could have charged a higher value for the IPO as that would have better represented the fair value of the company) - in fact, in a perfectly valued company it should track mostly flat as the investor return is priced into the dividend + some accumulation of value. The Facebook float, and the Zynga float, and numerous others, thus represents a good example of management and investment banks fully capitalising on the hype surrounding them to extract maximum returns for the early investors. The fact that this screws later investors is secondary.

wkasel 14y ago
With all due respect, I completely disagree. If you understand the fundamentals of an IPO, as I explained below you would know that there is a 180 day lock-up period for employees, this means that employees haven't been able to sell their stock yet. When they do sell their stock it will be at $10/$15/share. The only folks who made money on the IPO were Merrill Lynch who SHORTED IT! You're typically supposed to IPO at the point you are preparing to grow. Not flatline. Your original argument is exactly what I'm saying is the misguided philosophy of Silicon Valley, and the Tech Community as a whole. Again, no offense, but step back and look at what I just said. I have a point. This IPO fucked everyone, including Zuckerberg, employees, and anyone else who still holds shares which as I said above is every single employee.
- anewguy 14y ago
  Presumably the company has plans to invest the cash raised in the IPO to generate positive returns.
- epistasis 14y ago
  No, that's wrong, the only way an initial overvaluation hurts pre-IPO investors is if the stock gets delisted, or the market is so offended that it starts caring and undervalues the company. Otherwise, employees are just fine; Since the market doesn't care, it gives them fair value when they have a chance to sell. They lose out on cashing out during the over-valuation period, but that was just free money for those that pulled the strings, pre-IPO investors and Facebook management that could sell at IPO The only people hurt by the initial overvaluation were the people that bought high. Everybody else wins or is neutral. Everybody. Again, unless the market starts caring about retribution and undervalues them. Otherwise everybody gets exactly what the market will give them. The ibanks, Zuckerburg, and initial investors that sold on IPO day or shortly after, all win by a huge margin. They pulled the wool over lots of people's eyes; perhaps not intentionally, perhaps they honestly believed their own bullshit, but in any case their irrational exuberance hurt them not one bit.
  - btilly 14y ago
    Not true at all. Anyone hired after their valuation was fairly high who was given options would be given options with a high strike price. If the stock never gets there, those options are worth nothing. A large part of the people who were hired in the last year, with apparently generous option packages, now have Facebook on the resume and no golden handcuffs holding them. And a lot of other employees who had golden handcuffs are going to be thinking about places to bail. This could give them a significant retention problem.
    - epistasis 14y ago
      No, that's not right (might as well make it three comments in a row :) THere's no strike price on recent Facebook employee's equity; they receive RSUs, not stock options. Edit: here's an article describing it a bit more: http://www.businessinsider.com/facebook-ipo-stock-price-recruiting-2012-5 http://www.businessinsider.com/facebook-ipo-stock-price-recr... Due to many different employee's RSUs vesting in very small time window, there could be a whole bunch of other problems with flooding the market, as well as the and tax difficulties for employees that can't spread out their RSU income over multiple years.
aniro 14y ago
In this case "extract maximum returns for the early investors" means that a whole lot of people got ripped off. The notion that "the modern IPO is chiefly about giving early investors and staff an exit ticket" is a near perfect example of how "Silicon Valley, I hate to say it, has its head so far up its ass that it's eating its own bullshit." The investors purchasing Facebook at IPO and after are not looking to reward early investors or hand some sweet exit to a founder.. they are looking for a return on their investment dollars. If this is the prevailing attitude regarding the purpose of capital markets in Silicon Valley, I would be shocked if the IPO market for new tech stocks didn't shrivel up and die in the next (last?) few months. How odd that there is an excellent article sharing the front page about American "Looterism" replacing American Capitalism.
- wkasel 14y ago
  Well said. You're exactly right. I didn't cover it, but the larger concern I have here is that this misguided approach could lead to distrust from wall street of any tech IPO's that aren't enterprise, or low/mid cap.
  - robbiep 14y ago
    This is not a new phenomenon though. Look at tech bubble #1. hell, go back in time and look at Tulip Mania or the railroad bubble in the late 19th century. Wall Street will continue to do what is in it's interest. With average returns from Underwriting an IPO in the range of 7-9% they have to. Wall Street doesn't care that mum and pop investors get screwed - they just need to know that there are more out there that will continue to buy IPOs if they are presented in the right way. BTW, IPOs have been in long term decline (in terms of absolute numbers) for ~20 years now - see the economist http://www.economist.com/node/21555552?zid=300&ah=e7b9370e170850b88ef129fa625b13c4 http://www.economist.com/node/21555552?zid=300&ah=e7b937...
    - aniro 14y ago
      The gist of that article is that the number of firms going public or using capital markets to raise equity has diminished in favor of private-equity, irrespective of the number of firms in existence. Most of the reasoning behind it appears to be that the legal system has been modified in such fashion that it favors other forms of firm structure. Hardly indicative of any natural decline, it would be easy to take from this article that the Pump & Dump style IPOs (and other massive erosions of trust) are strangling the effectiveness of Capital Markets by scaring away investors and inviting increased regulation.

by robbiep 14y ago

wkasel 14y ago

With all due respect, I completely disagree. If you understand the fundamentals of an IPO, as I explained below you would know that there is a 180 day lock-up period for employees, this means that employees haven't been able to sell their stock yet. When they do sell their stock it will be at $10/$15/share. The only folks who made money on the IPO were Merrill Lynch who SHORTED IT! You're typically supposed to IPO at the point you are preparing to grow. Not flatline. Your original argument is exactly what I'm saying is the misguided philosophy of Silicon Valley, and the Tech Community as a whole. Again, no offense, but step back and look at what I just said. I have a point. This IPO fucked everyone, including Zuckerberg, employees, and anyone else who still holds shares which as I said above is every single employee.

anewguy 14y ago
Presumably the company has plans to invest the cash raised in the IPO to generate positive returns.
epistasis 14y ago
No, that's wrong, the only way an initial overvaluation hurts pre-IPO investors is if the stock gets delisted, or the market is so offended that it starts caring and undervalues the company. Otherwise, employees are just fine; Since the market doesn't care, it gives them fair value when they have a chance to sell. They lose out on cashing out during the over-valuation period, but that was just free money for those that pulled the strings, pre-IPO investors and Facebook management that could sell at IPO The only people hurt by the initial overvaluation were the people that bought high. Everybody else wins or is neutral. Everybody. Again, unless the market starts caring about retribution and undervalues them. Otherwise everybody gets exactly what the market will give them. The ibanks, Zuckerburg, and initial investors that sold on IPO day or shortly after, all win by a huge margin. They pulled the wool over lots of people's eyes; perhaps not intentionally, perhaps they honestly believed their own bullshit, but in any case their irrational exuberance hurt them not one bit.
- btilly 14y ago
  Not true at all. Anyone hired after their valuation was fairly high who was given options would be given options with a high strike price. If the stock never gets there, those options are worth nothing. A large part of the people who were hired in the last year, with apparently generous option packages, now have Facebook on the resume and no golden handcuffs holding them. And a lot of other employees who had golden handcuffs are going to be thinking about places to bail. This could give them a significant retention problem.
  - epistasis 14y ago
    No, that's not right (might as well make it three comments in a row :) THere's no strike price on recent Facebook employee's equity; they receive RSUs, not stock options. Edit: here's an article describing it a bit more: http://www.businessinsider.com/facebook-ipo-stock-price-recruiting-2012-5 http://www.businessinsider.com/facebook-ipo-stock-price-recr... Due to many different employee's RSUs vesting in very small time window, there could be a whole bunch of other problems with flooding the market, as well as the and tax difficulties for employees that can't spread out their RSU income over multiple years.

aniro 14y ago

In this case "extract maximum returns for the early investors" means that a whole lot of people got ripped off. The notion that "the modern IPO is chiefly about giving early investors and staff an exit ticket" is a near perfect example of how "Silicon Valley, I hate to say it, has its head so far up its ass that it's eating its own bullshit." The investors purchasing Facebook at IPO and after are not looking to reward early investors or hand some sweet exit to a founder.. they are looking for a return on their investment dollars. If this is the prevailing attitude regarding the purpose of capital markets in Silicon Valley, I would be shocked if the IPO market for new tech stocks didn't shrivel up and die in the next (last?) few months. How odd that there is an excellent article sharing the front page about American "Looterism" replacing American Capitalism.

wkasel 14y ago
Well said. You're exactly right. I didn't cover it, but the larger concern I have here is that this misguided approach could lead to distrust from wall street of any tech IPO's that aren't enterprise, or low/mid cap.
- robbiep 14y ago
  This is not a new phenomenon though. Look at tech bubble #1. hell, go back in time and look at Tulip Mania or the railroad bubble in the late 19th century. Wall Street will continue to do what is in it's interest. With average returns from Underwriting an IPO in the range of 7-9% they have to. Wall Street doesn't care that mum and pop investors get screwed - they just need to know that there are more out there that will continue to buy IPOs if they are presented in the right way. BTW, IPOs have been in long term decline (in terms of absolute numbers) for ~20 years now - see the economist http://www.economist.com/node/21555552?zid=300&ah=e7b9370e170850b88ef129fa625b13c4 http://www.economist.com/node/21555552?zid=300&ah=e7b937...
  - aniro 14y ago
    The gist of that article is that the number of firms going public or using capital markets to raise equity has diminished in favor of private-equity, irrespective of the number of firms in existence. Most of the reasoning behind it appears to be that the legal system has been modified in such fashion that it favors other forms of firm structure. Hardly indicative of any natural decline, it would be easy to take from this article that the Pump & Dump style IPOs (and other massive erosions of trust) are strangling the effectiveness of Capital Markets by scaring away investors and inviting increased regulation.