After the dust has settled, the lawyers and lawmakers have pontificated and the regulators have weighed in Facebook is trading and has bounced off its lows. Some investors are still under water and crying about the entire Facebook IPO (Initial Public Offering) process. It's stock price has tumbled, people are upset and securities law suits may be made. So what does all of this mean to individual investors?
The main point is that $16 billion was raised and no taxpayer money was needed to start the company that will create thousands of jobs, construct new buildings, enabling employees who will then build new houses and spend. But nowhere does it state that all investors are guaranteed a profit. That is how capitalism works.
The main point is that $16 billion was raised and no taxpayer money was needed to start the company that will create thousands of jobs, construct new buildings, enabling employees who will then build new houses and spend. But nowhere does it state that all investors are guaranteed a profit. That is how capitalism works.
THE PROCESS
Mark Zuckerberg creates an idea while a student at Harvard in 1996. He tests the idea and it seems to work. In order to keep going Zuckerberg needs cash, so like most all early ventures Zuckerberg looks to “friends & family”. We know that a gentleman named Savorin put in money, because he sold his stake at the IPO and took his money to Singapore, some say to avoid taxes. Facebook used this “friends & family” money to build the user a base and to create a better product.
Facebook likes the progress it is making but must generate more capital in order to reach the next level. Although there is still plenty of risk in the company, they convince the “evil” private equity firms to invest. There is a list of highly respected firms, to include Goldman Sacks, who invest over a $100 million in this “startup” company. Facebook uses this money to improve the product and eventually ends up with close to 900 million users. In addition to putting money into Facebook, many of the private equity firms offered advice in a number of areas.
Facebook now is in the position of needing more money to expand its business organically and/or by acquisition. They are now ready for “prime time”. They interview investment banks to run the IPO. Facebook hires Morgan Stanley to be the lead manager. Because the deal is so large, Morgan Stanley is assisted by other banks. The investment banks do what is called “due diligence” on Facebook. They write a prospectus that discloses everything that is material to the offering. They set an offering price range that will allow the shares to be sold. When the date is set the investment bank sets up “roadshows” to let investors meet management and “kick the tires.” During this time the investment bank and Facebook make a decision on what exchange to be listed. In this offering there were old investors who had invested in the early stages who wanted to sell some of their shares. This was disclosed in the prospectus.
The offering was priced at $38, which many felt was too high, but remember all shares were sold so Morgan Stanley did its job. It is the investment bank’s job to raise capital. It is not their job to allow the folks who purchased the IPO shares to get a “pop”. One of the interesting things about IPO’s is that they are judged on how much they go up in the few days after the IPO. If a stock goes up 20% on the opening should the investment bank have priced the stock 20% higher if the demand is there? Remember the job of the investment bank is to raise capital for the firm that hires them.
There were some negative signs that were in this offering... high amount of insider selling, over hype, and questions about the management, but all of this was disclosed in the prospectus. As I stated in the beginning… $16 billion was raised and no taxpayer money was needed to create a company that will create thousands of jobs, construct new buildings, enabling employees to construct new houses and spend money. Nowhere does it state that all investors are guaranteed a profit. This is how capitalism works.
Facebook likes the progress it is making but must generate more capital in order to reach the next level. Although there is still plenty of risk in the company, they convince the “evil” private equity firms to invest. There is a list of highly respected firms, to include Goldman Sacks, who invest over a $100 million in this “startup” company. Facebook uses this money to improve the product and eventually ends up with close to 900 million users. In addition to putting money into Facebook, many of the private equity firms offered advice in a number of areas.
Facebook now is in the position of needing more money to expand its business organically and/or by acquisition. They are now ready for “prime time”. They interview investment banks to run the IPO. Facebook hires Morgan Stanley to be the lead manager. Because the deal is so large, Morgan Stanley is assisted by other banks. The investment banks do what is called “due diligence” on Facebook. They write a prospectus that discloses everything that is material to the offering. They set an offering price range that will allow the shares to be sold. When the date is set the investment bank sets up “roadshows” to let investors meet management and “kick the tires.” During this time the investment bank and Facebook make a decision on what exchange to be listed. In this offering there were old investors who had invested in the early stages who wanted to sell some of their shares. This was disclosed in the prospectus.
The offering was priced at $38, which many felt was too high, but remember all shares were sold so Morgan Stanley did its job. It is the investment bank’s job to raise capital. It is not their job to allow the folks who purchased the IPO shares to get a “pop”. One of the interesting things about IPO’s is that they are judged on how much they go up in the few days after the IPO. If a stock goes up 20% on the opening should the investment bank have priced the stock 20% higher if the demand is there? Remember the job of the investment bank is to raise capital for the firm that hires them.
There were some negative signs that were in this offering... high amount of insider selling, over hype, and questions about the management, but all of this was disclosed in the prospectus. As I stated in the beginning… $16 billion was raised and no taxpayer money was needed to create a company that will create thousands of jobs, construct new buildings, enabling employees to construct new houses and spend money. Nowhere does it state that all investors are guaranteed a profit. This is how capitalism works.
For more information on portfolio management or for any of your financial planning questions, feel free to email Andy at aguzzetti@dlgwm.com or Contact Us.
