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Facebook's IPO was no 'disaster'

October 7, 2013: 3:31 PM ET

Twitter might not want to avoid becoming the next Facebook.

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FORTUNE -- Twitter will be the largest social media company to go public since Facebook (FB) did so in May 2012, so it is understandable that many are examining how the two offerings compare.

Inherent in this discussion is that Facebook's IPO was "bungled,"a "disaster" or the "biggest IPO flop ever." It is a false history, and Twitter should pay more attention to what actually happened than to the calcified media narrative.

For those who don't recall the specifics, Facebook originally filed to sell 337 million shares at between $28 and $35 per share (a particularly wide range). It later increased the range to $34-$38 per share, and ultimately priced 421 million shares at the high end, raising approximately $16 billion. All well and good until it was time for the shares to actually begin trading. The first glitch was immediately apparent: NASDAQ couldn't handle the volume, delaying orders for more than an hour. Part of this was due to massive buy-side demand. Some of it was because of an unexpected rash of sell orders, prompted by a downward revision in revenue projections (which Facebook had soft-sold in its S-1 document, but made more explicit to certain bank analysts).

Once the stock did begin to trade, it did so only modestly higher than the $38 per share offering price. And it nearly broke that floor in the trading day's final moments, only to be propped up by Facebook bankers. That victory was short-lived, as the stock was down to $31 per share by the following week and hit a low mark of $17.73 four months later.

No doubt the NASDAQ glitch was terrible, but that's not where Facebook is given blame. Instead, the company is accused to selling too many shares at too high a price -- greedily squeezing investors out of all their possible upside. Such critics advise Twitter to float fewer shares at a lower price than what the market might actually bear.

But, I wrote at the time, $38 was the perfect price:

Facebook paid its IPO underwriters to do one job, and one job only: Generate the most money possible through the initial public offering of Facebook stock. It did not pay them to offer 10-15% discounts so that Morgan Stanley (MS) or Goldman Sachs (GS) could ingratiate themselves to high-net-worth clients. That may be how it usually works in practice, but that doesn't make it right. Imagine if you found out your real estate broker had priced your home for $50,000 below market value because she thought it would generate more interactions with buyers for her other properties?

The reality is that Facebook got as much money today as the market was ready to give. If it continues to generate strong margins, then its price will rise and today's buyers will be ultimately rewarded. If its recent growth slowdown becomes a trend, then it could go the other way. But an IPO is a single-day event, for the primary purpose of generating issuer cash. And Facebook's bankers got it right, even if it was the last thing anyone expected.

Moreover, Facebook shares have rebounded from their early troubles. The stock has been above $38 for the past couple of months, and opened trading today at $50.74 per share. Sure some early flippers got burned, but why should Facebook care about them? Companies talk all the time about the value of long-term investors, and Facebook has done right by those folks.

Again, the "biggest IPO flop ever" raised more money almost any other IPO in history, and was priced 33% lower than where the shares trade 17 months later. The interim disappointment is just a memory for everyone who kept the faith (both internally and externally).

I'm sure Twitter wants to have a wildly successful offering with a stock price that never flags. But following in Facebook's footsteps wouldn't be such a bad alternative.

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Dan Primack
Dan Primack
Senior Editor, Fortune

Dan Primack joined Fortune.com in September 2010 to cover deals and dealmakers, from Wall Street to Sand Hill Road. Previously, Dan was an editor-at-large with Thomson Reuters, where he launched both peHUB.com and the peHUB Wire email service. In a past journalistic life, Dan ran a community paper in Roxbury, Massachusetts. He currently lives just outside of Boston.

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