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Facebook IPO could come with surprise twist

Posted on February 1st, 2012 at 23:11 by John Sinteur in category: Robber Barons -- Write a comment

[Quote]:

In “really hot IPOs,” 90 percent of the shares go to institutional investors and 10 percent to everyday investors, Sweet says. It’s a perk for the banks’ biggest clients, like Fidelity Investments or T. Rowe Price or hedge funds.

The funds pay big commissions to the banks for regularly trading large blocks of stocks or bonds. Those relationships are deep and long-lasting – and lucrative for the banks. The funds expect to be rewarded.

But Morgan Stanley and Goldman Sachs, the banks expected to guide the Facebook IPO, are in an awkward place: They don’t want to tick off 800 million Facebook users – but they don’t want to tick off Fidelity, either.

Most IPOs are underpriced, and the stock usually shoots up the first day. Lucky large investors get the basement price and usually a big payday if they sell on the first day. Smaller investors buy on the open market, after the price has spiked, and pay more.

And most early investors do sell. One university research paper found that about 70 percent of the new stock changes hands in the first two days. Groupon introduced 35 million shares, but on the first day its shares were traded almost 50 million times.

Ann Sherman, associate professor and IPO expert at DePaul University, raised the possibility that Facebook could set aside a portion of its shares for the small investor and use a lottery system if there is a lot of demand.

She says the U.S. is the only country without IPO rules that put traditional investors on an equal footing.

  1. Sue W on February 2nd, 2012 at 2:03:

    Look, it’s rigged. Don’t even think about it.

  2. Mykolas on February 2nd, 2012 at 10:07:

    Rigged – agreed – and been going on for a long time. The efficient market theory is just that: all theory.

  3. Mykokas on February 3rd, 2012 at 0:42:

    The devil is in the details http://www.mercurynews.com/business/ci_19877305
    (excerpted)

    The numbers in Facebook’s IPO filing on Wednesday give us the picture of a juggernaut, but not an unstoppable one.
    But there are four areas where the company shows clear vulnerability. In fact, it’s not exaggerating to say that, in some cases, these issues could sabotage the company’s growth, if not derail it completely:
    – Mobile: For me, this subject was the most startling and revealing. Facebook said it had 425 million monthly active users affected."who access Facebook through a smartphone, tablet or some other mobile product. That’s more than half of the 845 million who use Facebook.
    The problem: Facebook serves no ads on its mobile products. And therefore, it makes no money directly from those mobile users.
    –Zynga: We’ve long known that the San Francisco-based creator of social games such as FarmVille and CityVille has been one of the most popular attractions on Facebook. Still, the IPO filing revealed that 12 percent of Facebook’s revenues come through ads and payments from Zynga games. What’s more, that’s up from 10 percent the previous year.
    Zynga, for its part, had an IPO last December, and had already revealed that it’s still primarily dependent on revenue from its Facebook games. But now we learn that Facebook seems to need Zynga almost as much, making it one of the most intriguing and symbiotic relationships on the Web.
    So Facebook needs Zynga to keep making hit games almost as much as Zynga does. And Facebook founder Mark Zuckerberg and Zynga founder Mark Pincus need to keep the other smiling.
    – User growth: The company has built its remarkable revenue growth by insisting that it was mainly focused on building its user base. The strategy has paid off, and Facebook has silenced the doubters.
    But there are only so many people online, about 2 billion, and Facebook has 845 million of them. Subtract the 500 million in China, and there aren’t many left to get. So, inevitably, growth slows.

    — Governance: I put this last. But it will no doubt give investors some serious night sweats. Zuckerberg has arranged extraordinary agreements that allow him to vote the shares of his biggest investors. That gives him final say on just about all strategic decisions and corporate governance issues.

    In an era where the trend is to push for greater shareholder democracy, Zuckerberg has created something closer to a dictatorship, albeit a benevolent one. Or so he says.

    That’s fine as long as things are hunky-dory and growth and profits are headed up and to the right. But if there is a stumble, all the criticism is likely to fall on Zuckerberg’s shoulders. The pressure from the markets will be intense. And when that happens, his ideals will be tested to a degree that it may be hard for him to imagine.

    I think we are seeing the formation of an Internet Oligopoly that must be resisted and eventually broken if the internet is to survive as an innovative place. In some respects it is too late as what once the home of more academic, technical and creative folks has now become the electronic equivalent of k-mart and all that this implies.

  4. John Sinteur on February 3rd, 2012 at 15:58:

    SEC statement. Read the Risks section

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