Walt Laws−MacDonald | Show Me The Money!
Don’t believe the hype
Published: Thursday, October 18, 2012
Updated: Thursday, October 18, 2012 08:10
If you followed my column last semester — or read any of them, really — you probably know that I sort of freaked out about the Facebook initial public offering (IPO). It was a big deal. Facebook is the company, website, fad of our generation. Facebook has impacted the day−to−day lives of nearly a billion people in a way that few other products have.
But the reason I spent half the year talking about it has little to do with how the “like button” has revolutionized marketing or how Sandra just accidentally burned down her shed in Farmville. The Facebook IPO was unprecedented on several scales: 955 million active users, $3.71 billion in revenue, and a $100 billion valuation before its eighth birthday. As I mentioned in a column last year, Facebook didn’t really need to go public. Most companies schedule an IPO to raise capital, but Facebook wasn’t in any sort of cash crunch. Many, including myself, suspected that Facebook chose to go public because of an SEC rule that would have forced the company to release its financials, regardless of whether or not it was publicly traded.
Mark Zuckerberg confirmed this unconventional reasoning in Facebook’s official S−1 filing, saying “We don’t build services to make money; we make money to build better services.” Simply put, Facebook was never out to make a killing, but if it was going to release its financials it might as well make some money in the process. Publicly traded companies are held responsible by their shareholders. So what is a company that isn’t out to make money really worth?
The Facebook IPO was hyped to a level that had never been seen before. The media gave it a tremendous amount of attention, making sure everyone knew what it meant for the company, its users and the stock market itself. However, most news sources and I did a pretty terrible job describing what it actually meant for shares of Facebook and soon−to−be investors.
And herein lies the beginning of one of the most poorly mishandled IPOs in the history of the stock market. The IPO was extremely loud and incredibly slow — that is, much hyped and drawn out. The news was only covering the “event,” not how the shares would actually fare.
Before the IPO was even officially announced, the company was valued at close to $100 billion, making it one of the largest companies to ever list for an IPO. If Facebook had decided to go public a few years earlier, investors could see it as a growth opportunity. Instead, many felt that the company had already seen its quickest period of growth. Facebook was no longer adding new users as quickly as it once had, and it has struggled to monetize its mobile platforms, where most users now used the site.
If Facebook’s $100 billion price tag wasn’t enough to make investors pause, the number of shares offered was. Facebook planned to raise just $5 billion, or 5 percent of its total valuation when it opened for trading. When LinkedIn, by contrast, went public last year, it floated closer to 10 percent of its valuation on its IPO. Even after the number of Facebook shares was increased to 421 million, the total number dwarfed those available for trading.
As the IPO date crept closer, Facebook blew through its price range, moving from $25 to $35 to $34 to $38 a share. Thanks to the endless hype, Facebook saw a huge demand for the IPO, finally pricing its shares at $38.
Come back next week for “Part II: The Flub.”
Walt Laws-MacDonald is a sophomore majoring in quantitative economics. He can be reached at Walt.Laws_MacDonald@tufts.edu.