By: Jared Sorin
The Facebook IPO fiasco already is the subject of innumerable articles, blogs, tweets, and analyses. Virtually all of the discussion centers, however, on the obvious: Facebook (the issuer), Morgan Stanley (the lead underwriter), Nasdaq (the security exchange) and the investors who saw immediate decline in value.
Take a step back and we see that the collateral damage from the Facebook IPO fiasco may be far more important and of a significantly more material magnitude.
One analyst recognizes that the Facebook IPO fiasco has left “an unthinkably wide swath of scorched earth in its path.” The Facebook IPO was supposed to usher in a new wave of confidence and more IPOs. Instead, the Facebook IPO has weakened equity markets and shaken investor confidence. In an equity market that already has been reeling and in which there has been a long dearth of IPOs, Facebook, Morgan Stanley and Nasdaq may have together dealt another long lasting valley.
A viable IPO market requires that investors have confidence that the underwriting system and the SEC approval process vet companies. Moreover, IPO investors seek and expect that the IPO price will be set so as to ensure a bump up in the IPO price, often called the IPO ”price pop.” While the price pop clearly varies, the standard expectation is that the trading price will be about 15% over the IPO price. Facebook not only failed to deliver a price pop, its price flopped.
Facebook’s underwriters either badly misread the market demand for the IPO (assuming far greater demand than actually existed) or did a grave disservice to investors by artificially inflating the IPO price, setting in motion a chain of events likely to result in a decline in the IPO price once trading began. After all, the IPO ended up priced above the initial range, the number of shares offered in the IPO was increased, and pre-IPO early investors, founders and employees were permitted to sell more stock in the offering (thereby avoiding a lockup period during which they would have had to hold the stock). All of this increased the amount of the public float, which, under the inevitable laws of supply and demand, reduced the likelihood of the much desired IPO price pop.
In the absence of a price pop, IPO investors are less likely to invest their dollars in IPO issuances. In turn, if IPO issuances are less desirable investments, capital will not flow to the technology and innovative emerging companies that are the proven source of new jobs and wealth creation. If less money is allocated to IPO issuances, less money will come from venture capital sources, those who provide the most “risk” capital. Without risk capital, there is less capital formation for innovation, job creation, and growth. The downward spiral continues. Thanks, Facebook. Thanks, Morgan Stanley. And, thanks, Nasdaq.