Thoughts on Facebook IPO

I wanted to use this blog post to really help me assemble my thoughts on my presentation.  When dealing with Facebook’s IPO, it is important to first understand why a company would want to go public in the first place.  There are many reasons why a company would go public, but here are the three I found to be the most important.  First, going public gives liquidity to the employees of a company. It makes their once private stocks public, thus enabling them to get cash for them when they want to.  Another important reason that a company would want to go public is so that a value is established for the business.  Once it has gone public, there is no longer any debate about the company’s worth. There is a set net worth for the company based on the amount of stocks and each stock’s price.  The third reason for why a company would want to go public is because it establishes a currency for the company, which can be used to buy other companies, for mergers, acquisitions, and other such deals.  What establishing a currency means is basically that the company’s stock becomes a currency, which can be used in order to buy other companies. These are the main reasons why any company would want to go public, and this certainly applies to Facebook’s situation.  There is also the fact that the only way Facebook was making money was through advertisements on their website.  This was significant to the value of Facebook, but by going public, they were able to raise a large chunk of capital for the company’s future endeavors.  Although it raised billions of dollars through the IPO, it was still considered an unsuccessful IPO by many people.  How is this so?  First of all, the lead underwriter for the IPO, Morgan Stanley, set an initial price for the stock way too high.  When a stock goes public, the lead underwriter’s job is to poll the market, and to figure out where people value the company going public and what they would be willing to pay for the price of the stock.  They polled institutional investors, along with figuring out how much demand there is from individuals as well.  Apparently, Morgan Stanley didn’t do their homework as well as they should have because the price of the stock plummeted after going public.  The main reason I see that they overvalued it so much is probably because there was nothing that they could really compare Facebook’s stock to.  When a car company or any other company goes public, a good way to gauge the initial asking price is by the price of other businesses similar to them.  In Facebook’s case this wasn’t really a possibility because there was nothing quite like Facebook.  So, the IPO was considered unsuccessful by many because it showed that Facebook was not nearly as valued as many people thought, along with the fact that it soured the tech market for a long time after the IPO.

1 thought on “Thoughts on Facebook IPO

  1. Wouldn’t it make sense to set the IPO higher than the standard value? Basically, if I had something that was worth $X, I’d only be willing to offer it to others for more than $X. If I sold it at $X, I wouldn’t be making anything. Thus, if Zuckerberg wanted to offer bits of his company’s future for sale, wouldn’t it make sense for him to set a price for it higher than usual for logical sense? I can imagine how some companies would set the value much lower than expected in order to see a large rise of the value after IPO to get investors thinking, but setting it at market value seems to not make much sense.

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