Facebook’s much-hyped initial public offering started out with lots of hope, but it ended with a thud. The stock barely closed above the offering price of $38 a share—and only after the underwriters reportedly bought up enough stock to keep it in the plus column.
Why? There were four reasons.
1. Facebook was already semi-public, so the IPO “pop” had taken place much earlier. When Google went public in 2004, there wasn’t a highly developed market for shares of private companies. Now, exchanges like SecondMarket and SharesPost allowed insiders to cash out and institutional investors to buy in before Facebook went public.
These markets had driven up Facebook’s price 13-fold in four years of private trading, Bloomberg reported, and that took the wind out of the IPO’s sails.
2. Facebook insiders got greedy. With all the brouhaha about the offering, Facebook was able to get a peak offering price and sell 25% more shares than were originally planned. The beneficiaries were primarily Facebook employees and venture capitalists and other early investors. The insiders were able to squeeze every last drop of value out of the IPO, and investors who bought on Friday were left with a hollowed-out lemon.
3. General Motors spoiled the party. The automaker couldn’t have picked a worse time to announce that it wasn’t going to continue advertising on Facebook—timing so bad they might as well have been short Facebook stock. (Just kidding, folks.) Because by publicly dissing Facebook just days ahead of the offering, GM exposed Facebook’s biggest vulnerability: It doesn’t have a killer revenue source like Google did in paid search but instead has an “evolving” business model. Translation: We still don’t know how we’re going to make money.
4. Individual investors didn’t bite. Despite lots of hype in the media, retail investors took a “been there, done that” attitude and reportedly didn’t buy in heavily. An Associated Press-CNBC poll showed two-thirds of active retail investors thought the IPO would be overvalued when it went public, and many of those surveyed said Facebook was a fad. So, they sat on their hands.
And who can blame them? Investors learned some hard lessons from the dot.com bust, housing crash, and financial crisis, and one of them was that corporate insiders, investors, and big Wall Street banks don’t run offerings so John and Jane Q. Public can get rich. They’re entirely for the benefit of the investors and executives.
The Facebook IPO succeeded admirably at that, but not at much else. That’s why it turned out to be, by its own lofty standards, a dud.