Is the Facebook (FB) IPO a Flop?

Is the Facebook (FB) IPO a flop? Not on your life. It’s a sign that Silicon Valley has gotten as smart about finance as it has been about technology. I like it.

The smackdown of Facebook comes from the lack of a price pop on the first day of trading, compounded by declines in the company’s stock price in succeeding days. This is not a flop from Facebook’s perspective, it’s a success.

(A separate issue is NASDAQ order execution, which I’m not discussing here.)

What’s bad is not Facebook’s initial public offering, but the old Initial Public Offering model: the stock is sold at some price, let’s say $20. On the first day it jumps to, say, $35. Further upward movement follows on succeeding days, leaving the stock price at $40 a week after the IPO. What’s bad is that the company sold stock for $20 that it could have sold for $40, or at least $35. It’s a violation of fiduciary duty for the officers and directors to knowingly participate in such a scheme, though usually everyone is so happy to have the IPO completed, and to be so rich, that they don’t really care too much.

A company is not helped by the “pop” on the first day of trading, but others are greatly benefited. Those investors who got in at $20 and could get out the next day at $35 were obviously better off. How do you get to be such an investor? You do business with the investment house that underwrote the deal. The sad part of the story is that the corporation going public pays the underwriter a fee that’s usually seven percent of the proceeds for small issues and averages 3 ½ percent for large issues. Imagine paying a fee for the underwriter to favor its investment clients over the company going public. (The Facebook underwriting fee was reported to be 1.1 percent of the money raised.)

Here’s what good about the Facebook deal: the company worked for its own best interest and was not intimidated into favoring the investment banks. It negotiated a low fee and pushed for as high a price as the market would bear. Was it a flop? Not for Facebook. This is one deal to like.

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