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Facebook priced its IPO at $38, the top of its revised range. Yaaay.
Congrats to Facebook for having a very nice web page, but also to its banks, which collectively made $176mm, $202mm with the greenshoe, not even counting Goldman’s side action. This money seems to have been earned, more or less. Capital markets bankers do a lot, don’t ever suggest otherwise, in pushing and prodding issuers and investors together to get an IPO done. They teach greedy and inexperienced companies and insiders to be market-savvy: no, the VCs and executives can’t dump all their shares in the IPO; yes, you need a lockup for 90-180 days after pricing; yes, management needs to go to roadshow meetings and answer questions. They do due diligence – not just the legally required “are we selling a fraud,” but the marketed-oriented diligence of “what is this company’s story and how can we convey it to investors, while addressing any negatives and avoiding surprises?” And they are the deal’s repositories of market knowledge and feel – they don’t necessarily know if the markets will be up,* but they’re supposed to have an eye on the calendar and investor sentiment and to be able to at least get on calls with the company and blather convincingly about them. “Oh Fed minutes come out Wednesday, markets will be volatile. Fund inflows are negative for the third straight week. Greece. Something.”
So … about this Facebook deal. The roadshow annoyed investors and sometimes lacked star power. After demand was strong, insiders decided to dump a lot more shares, usually an unpleasant signal. And they shortened the lock-up. Retail allocations were increased at the last minute, rarely a sign of strength.** On the corporate operations side, some bad news came out mid-deal, with the bad news being “the company’s only source of revenue maybe kind of doesn’t work.” And as for market conditions, the S&P 500 is down 4.7% in the two weeks since the roadshow launched, and there has been marked unpleasantness for Greece, Spain, and big global banks.***
Was this an incredibly dumb IPO? If you magically grant FB a beta of 1.0 (like GOOG and AAPL), then the S&P drop theoretically cost $5bn of market cap or almost a $40 IPO price, which, I’ll just assert without checking that for the average IPO company destroying $5bn of market cap would leave you with negative amounts of company to IPO. And a whole lot of bankers will tell you that things like half-assing the roadshow and dramatically increasing the secondary sale while shortening the lockup will further depress demand.
And yet. It’s hard to look at this as anything but a wildly successful deal – I was going to say “in spite of challenging markets” but Facebook seems almost orthogonal to markets. (Like, say the S&P drop reflects earnings yields going from ~7.6% two weeks ago to ~7.2% today … are you using those numbers in any way in discounting your cash flows from Facebook? Also what cash flows? Etc.) Valuation for social media is pleasingly abstract and unrelated to the sort of financial work performed elsewhere, and the overlap between people with frenzied demand for Facebook and people with an eye on Europe – or, hell, on insider lockups – seems small. Facebook seems to have succeeded as an IPO as it succeeds as a social network, by providing a pleasant yet obsessive distraction from the serious events of the world.
Excited for call the close tomorrow?
* “If I did, I wouldn’t be working here” – every capital markets banker ever, all the time.
** Not that I’m suggesting it was a sign of weakness here – there was indication that FB wanted to sell a lot to retail for its own purposes. It’s just, y’know, not great in the normal playbook.
*** Here you can read a Zero Hedge theory that is like “maybe they’ll call a MAC because of all the badness,” but, no, I’m pretty sure you don’t call a MAC on things you knew before the deal priced. But they are bad things and slightly reduce my confidence in the greenshoe being exercised. Still taking the over there, though.