What really happened with the Facebook IPO
The fall of the Facebook IPO is a cautionary tale for investors large and small.
Well that didn't take long.
Less than a week after Facebook went public with a great amount of bang and clatter, angry investors have filed lawsuits accusing the company — and its underwriters — of deliberately misleading and selectively disclosing information about the company's revenues and earnings outlook.
Granted, the markers are in an exceptionally emotional state these days. Even when the jitters are a little less acute than they currently are, there's always a very thin line between love and hate.
And when love turns to hate over a wildly hyped $16 billion share issue, it's bound to have seismic implications.
There's also the whole matter of expectation management. Retail investors in particular often tend to view IPOs almost like lottery tickets, with the hope of a big, fast score. When it comes to Facebook, those expectations were torqued even more than usual.
As a result, when the shares lost 18.4 per cent of their $38 issue price in the first three days of trading and knocked about $3 billion off the value of the stock issue, things got ugly very quickly.
That said, the violent backlash against Facebook is really not much of a surprise.
For one thing, initial public offerings (IPO) are notoriously tricky beasts and they have a well-established pattern of soaring, then sliding. (There's a reason why major insurance companies sell special IPO insurance to cover the massive potential costs of liability risk related to prospectus errors, incorrect information dispersed at road shows and other mishaps.)
According to a research study completed by the University of Florida, the average IPO gains 18 per cent on the first day of trading but then goes on to underperform other shares in the sector for an extended period.
For individuals in particular, consensus is that the best strategy is to wait until the dust has settled — and the excitement has faded — before buying new share issues. (It's like buying a slightly used car and letting someone else take the big hit on initial depreciation for the privilege of driving it off the lot.)
A cool down period of 30 to 45 days is probably best to get the real measure of a stock and the company that's just issued it. That also allows analysts time to crunch through the newly accessible information and lets company officials pass through the legal "quiet period" when they're not allowed to publicly talk about the business.
In the recent example of LinkedIn's IPO, four weeks after the deal closed shares were selling for about half the issue price — and 50 per cent less than its subsequent price range.
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