[wkasel]

With all due respect, I completely disagree. If you understand the fundamentals of an IPO, as I explained below you would know that there is a 180 day lock-up period for employees, this means that employees haven't been able to sell their stock yet. When they do sell their stock it will be at $10/$15/share. The only folks who made money on the IPO were Merrill Lynch who SHORTED IT!

You're typically supposed to IPO at the point you are preparing to grow. Not flatline. Your original argument is exactly what I'm saying is the misguided philosophy of Silicon Valley, and the Tech Community as a whole. Again, no offense, but step back and look at what I just said. I have a point. This IPO fucked everyone, including Zuckerberg, employees, and anyone else who still holds shares which as I said above is every single employee.

[epistasis]

No, that's wrong, the only way an initial overvaluation hurts pre-IPO investors is if the stock gets delisted, or the market is so offended that it starts caring and undervalues the company. Otherwise, employees are just fine; Since the market doesn't care, it gives them fair value when they have a chance to sell. They lose out on cashing out during the over-valuation period, but that was just free money for those that pulled the strings, pre-IPO investors and Facebook management that could sell at IPO

The only people hurt by the initial overvaluation were the people that bought high. Everybody else wins or is neutral. Everybody. Again, unless the market starts caring about retribution and undervalues them. Otherwise everybody gets exactly what the market will give them.

The ibanks, Zuckerburg, and initial investors that sold on IPO day or shortly after, all win by a huge margin. They pulled the wool over lots of people's eyes; perhaps not intentionally, perhaps they honestly believed their own bullshit, but in any case their irrational exuberance hurt them not one bit.

[jussij]

> but that was just free money

Except the employees would have been sacrificing a higher salary for these shares so they where hardly free.

> The only people hurt by the initial over valuation were the people that bought high

The people that got burnt where those that read the IPO document and assumed it was not a work of fiction. The people that made money where insider trading on information not yet public.

The others that will get hurt are the next set of companies that try to float. The market will be reluctant to make the same mistake again.

Bad IPOs damage the credibility of the market and dmaage the ability of companies to float and that Facebook IPO was just a joke.

[robbiep]

Your post kind of suggests that this was the first major company to ever be overcapitalised and incorrectly valued. This is patently not the case. The people that bought into the FB IPO did so out of their own free will. That they believed the valuations is down to the hype surrounding the FBIPO and the hard work of the underwriters to convince investors of the strength of their case. There are 2 types of investors, informed and uninformed. These were uninformed investors. They operate under the principle that they can exceed the average market return (i.e. they don't understand the efficient markets hypothesis).

The market doesn't make these mistakes, the investors do. The market is the mechanism by which mistakes in valuation are discovered, as the IPO trends towards its fair value.

The fact that these are bad for the credibility of the market does not deter wall street for looking out for more sources of revenue (in the form of underwriting IPOs). It may make companies thinking of raising cash on the market think again - ('Is our valuation correct? How can we avoid being overhyped?') but in the long run this is nothing different to what has happened in hundreds of IPOs in hundreds of stock markets in hundreds of companies over the past several hundred years.

[josephlord]

It is quite possible to understand the efficient market hypothesis and not believe it. In fact I think that everyone who invests in the market in forms other than tracker funds doesn't believe it holds.

The efficient market hypothesis is a useful thought experiment but the assumptions required for its proof are unrealistic and it doesn't explain real world volatility.

I do think the thought process of 'what do I know that the market hasn't taken into account yet' is a useful one and that if the answer is nothing buy a tracker. The knowledge could be proper research that disagrees with the media about a company.

[robbiep]

I like and agree with your point

[jussij]

I have no problem with that fact that the IPO was a disaster. As you point out this has happened before and it will happen again.

What I don't like is the FB prospectus was never a true and accurate representation of the company and everyone on the inside knew this, but they failed to tell the public.

And what's worse is these 'well informed' insider investors then illegally used this inside information to make lots of money since they new the IPO was over valued and went short.

[wkasel]

Spot on.

[btilly]

Not true at all.

Anyone hired after their valuation was fairly high who was given options would be given options with a high strike price. If the stock never gets there, those options are worth nothing.

A large part of the people who were hired in the last year, with apparently generous option packages, now have Facebook on the resume and no golden handcuffs holding them. And a lot of other employees who had golden handcuffs are going to be thinking about places to bail. This could give them a significant retention problem.

[epistasis]

No, that's not right (might as well make it three comments in a row :)

THere's no strike price on recent Facebook employee's equity; they receive RSUs, not stock options.

Edit: here's an article describing it a bit more: http://www.businessinsider.com/facebook-ipo-stock-price-recr... Due to many different employee's RSUs vesting in very small time window, there could be a whole bunch of other problems with flooding the market, as well as the and tax difficulties for employees that can't spread out their RSU income over multiple years.

[btilly]

I didn't realize that they were using RSUs. That does change the equation.

I would be curious what a tax lawyer would say about AMT liability. But AFAIK you're right, there is no problem.

[robbiep]

I agree with your point about every techcrunch etc saying what 'facebook NEEDS to do' - as if you can judge the failure/success of a company 3 months post IPO on the value of a stock.

I continue to disagree with you about this fucking Zuckerberg/Employees etc. They have turned paper money into real money. They have lost - psychologically - some unreal money in their freeze period (BTW I was not aware of this, I am much more familiar with Australian securities law). The ~70 Billion of shares from outside investors (Guestimate, I don't know how much stock was retained by employees) - has capitalised the company however, and these are the people who are getting b*tchsplapped by the invisible hand.

With regard to IPO as you are preparing to grow - yes. But that just highlights the nature of IPOs in a bubble. As another poster said, they have managed to significantly capitalise the company despite the fact that rational investors have subsequently brought the share price back to something that (they consider) is more properly the fair value. the idea that a shareprice should skyrocket post IPO is a fallacy that goes against the Efficient Market Hypothesis - i.e. that in the long run you can't achieve returns that are greater than the average market return. This same fallacy is what most 'uninformed' investors are investing in the market under - and it is the existence of these investors that allows informed investors to make a killing on their behalf - in this case, Merrill (and assumably lots of others) by shorting the stock.

[h1srf]

Merrill shorted FB at the IPO? I seriously doubt that. First of all, I don't think there would be enough inventory to borrow for a few days. Secondly, the borrow cost would have been astronomical for those first few days. There was a WSJ article that talked about the borrow dropping from 40% to 6% about a week after the IPO. Are you talking about that period?

[robbiep]

No h1srf I don't know anything about merrill shorting it, I was responding to wkasel's assertion in the second post of this thread that they did so. I have done no research regarding shorting on fb in this period.

However Morgans would have made a double killing in the post-ipo period having oversold the allocation and now being able to fill those orders cheaply on the secondary market (assuming they didn't issue new stock to fill the orders)

[wkasel]

I back everything up with facts amigo. They shorted it $2.4B.

http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stan...

[anewguy]

Presumably the company has plans to invest the cash raised in the IPO to generate positive returns.