The Great Debate

In 1988, Michael Dell was a 23-year-old wunderkind who sold cheap computers directly to “end users,” which is what he called his customers. He arranged an initial public offering to raise cash and attract top-tier engineers and managers while basking in the light of transparency.

Dell was so small that the IPO wasn’t mentioned in the New York Times. At around $12 million, or $23 million in 2013 dollars, the book value of Dell’s common stock likely would have been too low to entice a modern-day Goldman Sachs, one of its lead underwriters. But Dell’s IPO was a winner. In two months, its stock price jumped from $8.50 to $19 per share. By the end of the year, it had made $159 million in sales.

Last week, Dell announced a stunning $24.4 billion leveraged buyout. If the plan manages to survive, it will allow Dell to reboot his ailing company free from the public glare. The deal is the largest of its kind since 2008, but it’s also notable because it marks the waning of the public company era.

Public companies built railroads, cars, fast-food empires, cheap PCs and many goods and services that Americans still consume. For decades, a company like Dell could take a chance at being publicly traded in exchange for an influx of cash. But if Michael Dell were starting out today, he probably wouldn’t take his company public.

The number of public companies listed on U.S. exchanges dropped to 4,977 in 2012 from a peak of 8,823 in 1997, according to the World Federation of Exchanges. The number of IPOs fell, too. A September paper released by the Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies reports that from 1980 to 2000, there were, on average, 311 IPOs a year. That number has decreased to an average of 99 a year since 2001.

As Morgan Stanley’s retail force is learning, it’s hard being the anointed one. To most of the world, Morgan Stanley got the plum job of lead manager for the most important public stock offering since Google in 2004. But among the retail sales force at the firm, the Facebook Blessing might as well be known as the Facebook Curse.

The refrain from Morgan Stanley’s rank and file: The IPO of the decade is a lose-lose proposition. That’s because retail investors as well as smaller institutions are likely to be disappointed with their Facebook allotment. Institutional players know how things roll, but for the retail brokerage force, the situation is particularly vexing. Many clients assume that because it is a lead underwriter, Morgan Stanley brokers are on the inside track. That’s true, but means less on a popular IPO like Facebook’s. Financial advisers in the lead group, which also includes Goldman Sachs and JPMorgan, do have an edge over the 30 other investment banks tasked with distributing shares. But it’s not much of an advantage. Global demand for the $11 billion in shares appears to be much bigger than the deal itself. Institutional salespeople at Morgan Stanley are already warning clients that they expect the deal to be 20 times oversubscribed, one source explained to me.

It’s always been the case that only a thin sliver of retail investors would be able to get hot IPO shares. They were typically high-net-worth clients who reliably invest in every single IPO that would come their way – hot or not. Shakier deals, of course, were always available to retail clients. In its heyday, Lehman Brothers brokers used to say that some of the mediocre IPOs they pushed were from the “institutional waste basket.”

Facebook shouldn't pay its users. Its users should pay to own Facebook.

“Facebook was not originally created to be a company,” founder Mark Zuckerberg wrote in his letter to investors announcing the IPO of his already hugely successful and profitable company. “It was built to accomplish a social mission — to make the world more open and connected.”

Facebook has succeeded wildly, despite internal admonitions that its “journey” is only 1 percent finished. Journalists have latched onto Zuckerberg’s statement that Facebook wants to “rewire” the way the world works. In a world of thousands of self-anointed “social media experts,” only Zuckerberg can claim to have basically invented what the world thinks of as social media. He has etched himself into the timeline of human innovation.

Pity then, that Zuckerberg hasn’t turned his talents or attention toward Facebook’s financial underpinnings. After all, an IPO? How ho-hum can he get? If Mark really wants to accomplish his social mission with Facebook, he should share the company’s ownership with the people who helped him create it. Not just his Harvard contemporaries. Not just the programmers. Not even just the venture capitalists.

– Eric Auchard is a Reuters columnist. The opinions expressed are his own –

The U.S. venture capital industry is desperate to repair the market for initial public stock offerings, but reviving the goose that once laid hundreds of golden eggs may not get very far.

The National Venture Capital Association (NVCA) this week set out its comprehensive plan to revive the IPO market and the heady investment returns that once fueled the tightly knit venture capital industry’s success.

– Alexander Smith is a Reuters columnist. The opinions expressed are his own –

Volumes may be down, but there are green shoots appearing in the M&A market after the frozen winter of financial distress.

This doesn’t mean a return to the boom years of a few years ago. It could take years for deal values to reach the dizzy heights of the second quarter of 2007, given falls in asset prices. But the number of deals is recovering fast. This fell off a cliff in Q1 of 2009 and at just over 8,000 deals was the lowest global tally since Q3 2004.