Much ado about nothing

May 18, 2012

567 million shares of Facebook changed hands today — that’s more than the total number of shares issued — at a volume-weighted average price of just over $40 per share. To put it another way, the whopping move from the IPO price of $38.00 to the closing price of $38.23 came with more than $22 billion of trading activity, and undoubtedly left the underwriting banks with rather more Facebook stock on their books than they had been hoping for. But that’s what it means to be an underwriter.

For anybody disappointed that they didn’t get their full initial allocation of stock, or who thinks that small retail investors can’t buy into IPOs at the same price that large institutional investors can, this is great news: Monday’s going to be a do-over, with everybody being able to buy Facebook stock at the IPO price.

This of course helps to point up just how silly all the Facebook IPO hype really was. Yes, Facebook is now a public company, but it’s still controlled by Mark Zuckerberg, and the IPO itself was a bit of a farce: delayed at the open, artificially supported by the underwriters at the close, and mainly serving to demonstrate that a brand-new company, which no one knows how to value, trading at a stratospheric valuation, can still somehow end up trading within an incredibly narrow range on enormous daily volume.

For that, you can probably thank the surprisingly old-fashioned book-building process, where a team of investment bankers took Facebook on a classic roadshow, complete with a slick and rather embarrassing video, all for a record-low fee of 1.1% of the proceeds. Still, never mind the low fee: the bankers were paid to do a job, and they did it, providing a rock-solid bid at exactly $38 per share and thereby sending a clear signal to any potential future client: we’re never going to let investors lose money on the first day. Frankly, there are worse ways of spending money to try to bolster your reputation.

But while this was an incredibly important deal for people working in equity capital markets, it really wasn’t important for the rest of us. Facebook today is the same as Facebook yesterday: a site where we keep in touch with our friends, and a means of staking out a bit of personal identity on the internet. If you think that’s a hugely valuable proposition, then there are hundreds of millions of shares available, now, for you to buy on the open market. And I’m quite sure that there’s no shortage of big investment banks who would be positively delighted to sell them to you. Ideally, for them, at a price somewhere north of $38.


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