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Please state if I'm incorrect but the whole point of a company doing a IPO is it wants to sell off a portion of itself in order to raise capital.

So in an IPO, I presume a company would aim to sell their stock at as high a price as is possible whilst still having the demand to raise the necessary funds.

With Facebook, their initial price was $38. The price tanked after the 2nd day and is now at $31 but does Facebook really care at this point? They've already pocketed $38 from the early investors who would've been the ones to lose the $7 per share.

So if anything, isn't this an indication the IPO went well for them? They managed to achieve their objective of raising the funds they wanted. The fact that the price has fallen means that they marketed the IPO well and got a good deal for each share.

Nobody forced the early investors to buy at $38, and the fact there was demand to buy at that price isn't really Facebook's fault.

Is this logic correct? Or does the fact that Facebook's IPO fizzled affect the company in some way?

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4 Answers 4

You are right that Facebook really doesn't get impacted as they got their $38. However it would make it slightly more difficult for Facebook to raise more money in future as large investors would be more cautious. This can keep the price lowers than it actually needs to be. Quite a few companies try to list the IPO at lower price so that it keeps going up and have more positive effect overall there by making it easier for future borrowings.

See related question
Why would a company care about the price of its own shares in the stock market?

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@Joe.E, I disagree with your logic.

The IPO clearly didn't go well--not relative to other IPOs. Were it not for the stocks underwriters stepping in late in the trading day, Facebook would likely have closed below their opening price.

This story and others indicate that institution investors were given negative information by an analyst for the underwriters that other investors didn't have. This inside knowledge is certainly contributing to the drop in the stock. It's fair to argue that many individual investors were suckered into buying the stock at the IPO price because of this incomplete disclosure.

It wouldn't surprise if what's happens has a negative impact on future trading volume, and creates reluctance to invest in the firm--which would certainly be an additional negative outcome beyond the dropping stock price.

Edit: Dilip mentioned a lawsuit. Here's a link to an article about it.

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I don't know about in the US, but in Australia most comentators were saying that the IPO price was overvaluing the company and that the price would drop after listing, and any depand for the IPO was fueled mainly by the hype. –  Victor May 24 '12 at 4:40
    
@Victor I think you're right about the demand being fueled by hype. Compared to Google, I think Facebook is still behind when it comes to their capabilities and desirability as an ad sales platform. Facebook is either going to have to show its users a lot more ads, sell their personal data, or both to justify their valuation. –  Scott A. Lawrence May 24 '12 at 15:49

There could be an impact on Facebook because just before the IPO, Morgan Stanley apparently sent information to selected clients that their analysts had just lowered their valuation of the company. There were also reports yesterday that the lowered valuation came about because Facebook sent some revised preliminary estimates of second quarter earnings (showing lower than expected earnings) to Morgan Stanley, and least one talking head said that Facebook might also face charges depending on what the cover letters and the e-mails back and forth between Facebook and Morgan Stanley said. Investigations have already been opened. Yes, a company wants to sell the stock being offered at the IPO at the highest price possible, but if it misled the public when offering the stock for sale (through its underwriters), it can also be liable, possibly even criminally liable.

Material added in Edit: In fact, a lawsuit has already been filed in the US District Court in Manhattan in this matter. Whether the SEC ever does anything about the matter remains to be seen.

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"a company wants to sell the stock being offered at the IPO at the highest price possible" -anthropomorphizing of the company aside, what is the impact to the bottom line of the IPO price? Isn't FB balance sheet the same, $30 or $300? –  JoeTaxpayer May 23 '12 at 18:42
    
@JoeTaxpayer - isn't the higher the price, the less ownership the original owners have to give up or the more money they rise. either way, it's good for facebook –  Joe.E May 24 '12 at 2:34
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Not sure what you mean. The shares floated were the same percent of shares outstanding regardless of the price. –  JoeTaxpayer May 24 '12 at 3:56
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A down vote: I suppose someone on Facebook did not "Like" my answer. :-) –  Dilip Sarwate May 24 '12 at 13:03
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@JoeTaxpayer : Really? well maybe I do have a misconception of what an IPO is. I thought that the company would issue a bunch of new shares, sell it at a price, and then the company could use the sale of those shares to expand their business. So is that wrong? Cause what's the point of Facebook issuing an IPO if it didn't gain any capital from it? –  Joe.E May 24 '12 at 22:17

Discussing individual stocks is discouraged here, so I'll make my answer somewhat generic. Keep in mind, some companies go public in a way that takes the shares that are held by the investment VCs (venture capitalists) and cashes them out of their positions, i.e. most if not all shares are made public. In that case, the day after IPO, the original investors have their money, and, short of the risk of being sued for fraud, could not care less what the stock does.

Other companies float a small portion up front, and retain the rest. This is a way of creating a market and valuing the company, but not floating so many shares the market has trouble absorbing it. This stock has a "Shares Outstanding" of 2.74B but has only floated 757.21M. The nearly 2 billion shares held by the original investors certainly impact their wallets with how this IPO went.

See the key statistics for the details.

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Joe, the question was whether the IPO went well for the company rather than whether it went well for the venture capitalists who presumably are holding on to at least part of the nearly 2 billion shares of stock that was not floated. –  Dilip Sarwate May 23 '12 at 18:19
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Hmm. I see. The IPO was a transfer of money from new investors to the original investors in exchange for stock. I'm almost inclined to say the IPO itself was neutral to Facebook itself. (almost) –  JoeTaxpayer May 23 '12 at 18:25

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