Chart of the day, Facebook IPO edition

By Felix Salmon
February 14, 2012
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There are two ways of looking at the $5 billion or so that Facebook is going to raise in its IPO. One is to ask what on earth the company is going to do with all that money: it’s already making substantially more in the way of profits than it is likely to want to spend, and the chances are that the $5 billion is just going to go straight into the bank, where it will earn roughly 0.77% per year. This is not the best use of shareholder funds, and it’s hard to see why Facebook’s CFO would want the cash pile to be any bigger.

On the other hand, $5 billion is very small as a percentage of Facebook’s market capitalization. Here’s Allan Sloan:

If Facebook’s offering ends up being the advertised $5 billion, and the company’s stock market valuation is in the expected $75 billion to $100 billion range, it means that only 5 to 7 percent of the company’s shares will be available to public investors.

While there are all sorts of rationalizations for having such a small public offering relative to a company’s size, the real reason, as any Street insider will tell you, is to create an initial shortage of stock so that the share price runs up when public trading starts.

It’s not enough for Mark Zuckerberg & Co. to have created an amazing, incredibly valuable company over an incredibly short period. They feel the need to use this tacky market trick to drive up Facebook’s value even more.

Sloan has a point, here: it’s very rare for companies to go public while selling less than 10% of their stock. Here’s a chart from Thomson Reuters, showing the free float at IPO for all US issues from 1/1/2000 onwards which had a market capitalization at IPO of more than $1 billion.


As you can see, it’s very rare to go public with a float of less than 10% of the company: the average for tech companies is 19%, and the overall average is 26%.

And if you look at IPOs which raise more than $500 million, the percentages get bigger still: if you’re raising more than half a billion dollars, then tech companies end up with a free float of 34% of their company, on average, while overall, companies float 43% of their shares.

So, is Sloan right? Is Facebook’s small free float a “tacky market trick”?

My feeling is that it isn’t — and that it’s rather a function of the way in which Facebook stock is distributed. Since the company doesn’t really need to raise equity capital, the only other way to increase the free float is to persuade existing shareholders to sell their stock into the IPO. Mark Zuckerberg certainly doesn’t want to do that — to the contrary, he wants to retain as much stock and control as possible. And most of his fellow shareholders are similarly rich and fond of their stock, preferring to wait a while before selling.

In other words, what we’re seeing here is the natural consequence of what happens when the stock market essentially forces companies to be profitable before they go public. In the olden days, when companies went public because they needed the money, they would sell quite a lot of stock. Today, that’s no longer the case, especially in Silicon Valley, where capital-raising rounds are generally done privately, with VCs. If Facebook hadn’t been able to raise well over a billion dollars privately, then it might have gone public earlier, selling more of its stock in the process. But given the way that equity investing in early-stage companies has moved from the public to the private markets, what we’re seeing is pretty normal, and not really a tacky market trick at all.


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Why are Zuckerberg’s “fellow shareholders…fond of their stock, preferring to wait a while before selling” at a p/e of 75 and price/revs of 8? Maybe it’s because they expect a “tacky market trick” to artificially drive up the price.

You’re welcome.

Posted by johnhhaskell | Report as abusive

Chart doesn’t really illustrate whether it’s uncommon to have

Posted by right | Report as abusive

Perhaps they’re going public because they have so many shareholders that it’s not easy to comply with SEC rules as a private company. Perhaps they want to provide liquidity for employees.

$5 billion is a reasonable market float. There are a lot of public companies with much smaller total market caps.

Posted by 3oosion | Report as abusive

I thought in the recent SEC filing he basically said, point-blank, this is nothing more than to help a bunch of early-in 25-30 year olds employees a quick way to start hacking away at their bucket lists now that they have hit the 500 investor threshold (or are fairly close).

Posted by AJB111 | Report as abusive

‘zackley. You sell a little stock, raise some money the company doesn’t need, and set a proper “market price” for the hoards held by insiders who can then sell into the market or, as is the custom (for tax avoidance purposes), borrow a few tens of millions against their stock and thus achieve for themselves the requisite “lifestyle.”

Posted by Eericsonjr | Report as abusive

I agree with Felix and will add that the sheer size of the IPO makes the percentage cited by Allan Sloan less relevant. Even at a $5 billion IPO size – which might increase in any case – the IPO size and market cap are both much larger than the previous largest Internet IPO. (Google sold $1.9 billion of shares in its IPO at a $23 billion market cap). While there have been larger IPO’s, those have been more mature, established, lower P/E ratio companies such as large Chinese banks, VISA, GM, and the split-offs of AT&T Wireless and Kraft. These is clear enthusiasm for Facebook, but I think it’s reasonable for underwriters not to want to push the size limit for an IPO that is expected to be valued at a P/E of 75x to 100x.

Also, public market liquidity is a function of dollars of shares that can trade, not just percent float, and $5 billion is enough public shares that the market should be extremely liquid.

Posted by realist50 | Report as abusive

Felix – you are barking up the wrong tree. take a look at CZR’s recent IPO… they sold $20 Million Dollars worth of stock…

Posted by KidDynamite | Report as abusive

Anybody who buys stock in a company where the founder retains voting control and ivnestors have no ability to oust management is a fool…

Posted by mfw13 | Report as abusive