You're typically supposed to IPO at the point you are preparing to grow. Not flatline. Your original argument is exactly what I'm saying is the misguided philosophy of Silicon Valley, and the Tech Community as a whole. Again, no offense, but step back and look at what I just said. I have a point. This IPO fucked everyone, including Zuckerberg, employees, and anyone else who still holds shares which as I said above is every single employee.
The only people hurt by the initial overvaluation were the people that bought high. Everybody else wins or is neutral. Everybody. Again, unless the market starts caring about retribution and undervalues them. Otherwise everybody gets exactly what the market will give them.
The ibanks, Zuckerburg, and initial investors that sold on IPO day or shortly after, all win by a huge margin. They pulled the wool over lots of people's eyes; perhaps not intentionally, perhaps they honestly believed their own bullshit, but in any case their irrational exuberance hurt them not one bit.
Except the employees would have been sacrificing a higher salary for these shares so they where hardly free.
> The only people hurt by the initial over valuation were the people that bought high
The people that got burnt where those that read the IPO document and assumed it was not a work of fiction. The people that made money where insider trading on information not yet public.
The others that will get hurt are the next set of companies that try to float. The market will be reluctant to make the same mistake again.
Bad IPOs damage the credibility of the market and dmaage the ability of companies to float and that Facebook IPO was just a joke.
The market doesn't make these mistakes, the investors do. The market is the mechanism by which mistakes in valuation are discovered, as the IPO trends towards its fair value.
The fact that these are bad for the credibility of the market does not deter wall street for looking out for more sources of revenue (in the form of underwriting IPOs). It may make companies thinking of raising cash on the market think again - ('Is our valuation correct? How can we avoid being overhyped?') but in the long run this is nothing different to what has happened in hundreds of IPOs in hundreds of stock markets in hundreds of companies over the past several hundred years.
The efficient market hypothesis is a useful thought experiment but the assumptions required for its proof are unrealistic and it doesn't explain real world volatility.
I do think the thought process of 'what do I know that the market hasn't taken into account yet' is a useful one and that if the answer is nothing buy a tracker. The knowledge could be proper research that disagrees with the media about a company.
What I don't like is the FB prospectus was never a true and accurate representation of the company and everyone on the inside knew this, but they failed to tell the public.
And what's worse is these 'well informed' insider investors then illegally used this inside information to make lots of money since they new the IPO was over valued and went short.
Anyone hired after their valuation was fairly high who was given options would be given options with a high strike price. If the stock never gets there, those options are worth nothing.
A large part of the people who were hired in the last year, with apparently generous option packages, now have Facebook on the resume and no golden handcuffs holding them. And a lot of other employees who had golden handcuffs are going to be thinking about places to bail. This could give them a significant retention problem.
THere's no strike price on recent Facebook employee's equity; they receive RSUs, not stock options.
Edit: here's an article describing it a bit more: http://www.businessinsider.com/facebook-ipo-stock-price-recr... Due to many different employee's RSUs vesting in very small time window, there could be a whole bunch of other problems with flooding the market, as well as the and tax difficulties for employees that can't spread out their RSU income over multiple years.
I would be curious what a tax lawyer would say about AMT liability. But AFAIK you're right, there is no problem.
I continue to disagree with you about this fucking Zuckerberg/Employees etc. They have turned paper money into real money. They have lost - psychologically - some unreal money in their freeze period (BTW I was not aware of this, I am much more familiar with Australian securities law). The ~70 Billion of shares from outside investors (Guestimate, I don't know how much stock was retained by employees) - has capitalised the company however, and these are the people who are getting b*tchsplapped by the invisible hand.
With regard to IPO as you are preparing to grow - yes. But that just highlights the nature of IPOs in a bubble. As another poster said, they have managed to significantly capitalise the company despite the fact that rational investors have subsequently brought the share price back to something that (they consider) is more properly the fair value. the idea that a shareprice should skyrocket post IPO is a fallacy that goes against the Efficient Market Hypothesis - i.e. that in the long run you can't achieve returns that are greater than the average market return. This same fallacy is what most 'uninformed' investors are investing in the market under - and it is the existence of these investors that allows informed investors to make a killing on their behalf - in this case, Merrill (and assumably lots of others) by shorting the stock.
However Morgans would have made a double killing in the post-ipo period having oversold the allocation and now being able to fill those orders cheaply on the secondary market (assuming they didn't issue new stock to fill the orders)
http://blogs.reuters.com/felix-salmon/2012/05/21/morgan-stan...
The notion that "the modern IPO is chiefly about giving early investors and staff an exit ticket" is a near perfect example of how "Silicon Valley, I hate to say it, has its head so far up its ass that it's eating its own bullshit."
The investors purchasing Facebook at IPO and after are not looking to reward early investors or hand some sweet exit to a founder.. they are looking for a return on their investment dollars.
If this is the prevailing attitude regarding the purpose of capital markets in Silicon Valley, I would be shocked if the IPO market for new tech stocks didn't shrivel up and die in the next (last?) few months.
How odd that there is an excellent article sharing the front page about American "Looterism" replacing American Capitalism.
BTW, IPOs have been in long term decline (in terms of absolute numbers) for ~20 years now - see the economist
Most of the reasoning behind it appears to be that the legal system has been modified in such fashion that it favors other forms of firm structure.
Hardly indicative of any natural decline, it would be easy to take from this article that the Pump & Dump style IPOs (and other massive erosions of trust) are strangling the effectiveness of Capital Markets by scaring away investors and inviting increased regulation.
Secondly, the marketplace often operates on the stupidity of the masses. Intelligent fund managers stay away from overpriced IPOs, the uninformed masses pile in because they hear the hype and are not value investors so don't know/care that the revenues aren't behind the company.
3- A successful IPO is one that is fully capitalised and gives the company new cash. It is not one that goes through the roof. This would represent a failure of the Merchant Bank to properly capitalise on the company's value (They could have charged a higher value for the IPO as that would have better represented the fair value of the company) - in fact, in a perfectly valued company it should track mostly flat as the investor return is priced into the dividend + some accumulation of value.
The Facebook float, and the Zynga float, and numerous others, thus represents a good example of management and investment banks fully capitalising on the hype surrounding them to extract maximum returns for the early investors. The fact that this screws later investors is secondary.