Historically, more initial public offerings have been underpriced than overpriced. In the dot.com bubble, companies conducting IPOs often set their offering price too low, resulting in huge first-day “pops” for investors. The average first-day return of an IPO in 1999 and 2000 was a share-price appreciation of 65%, according to research by Jay Ritter of the University of Florida. As a result, companies and their bankers were accused of focusing on factors besides maximizing the net proceeds raised in the IPO.
But last Friday, social-networking giant Facebook made the opposite mistake — pricing its initial share offering too high. And that mistake may have more noticeable and lasting ramifications than the underpricing that occurred in the last tech boom.
Facebook went public at $38 a share, but it closed below that on the first day and slipped below $32 per share on Tuesday.
“If we believe markets are efficient, the market definitely thinks that 38 [dollars] was too high; at least it does yesterday and today,” says Jacqueline Garner, associate professor of finance at Drexel University’s LeBow College of Business. “Price support went away in a day, and when that price support went away, the true picture was revealed,” she says.
In comparison to Facebook’s below-IPO share-price closing on its first day, many issuers have had first-day pops of typically 7% to 20%, even in the years outside of the dot.com bubble “On the one hand, [the issuer] leaves money on the table. But on the other hand, [they’ve] left a good taste in investors’ mouths,” says Garner. “Having an overpriced deal is not a ‘first best.’”
Technical issues with Nasdaq’s trading systems could have played a role, say experts. “We’ll never know how Friday’s initial day of trading may have played out, due to Nasdaq’s technical problems,” says Lee Graul, a partner in the capital markets practice at BDO USA. “But the continued decline today might be an indication that there was too much hype during the preoffering period.”
Facebook’s biggest problem might be repairing relations with those investors that swallowed the hype and now have a paper loss on the shares they own. “Think about an investor who paid 38 and is now holding the shares of a firm where the impact of investors’ voting power is potentially negligible, since insiders at Facebook have greater than 50% control of the votes,” says Garner. “As an investor, that might be a little maddening.”
Other long-term damage is unclear. “Whether or not this hurts Facebook going forward, that’s still to be determined,” says Garner. “We’re always getting new information on earnings and cash flows, and future cash flows could change and the price could go back up to $38.”
If the price of Facebook shares recovers in the next couple of years, future equity offerings by the firm shouldn’t be affected, says Garner. But certainly the initial performance of Facebook’s shares could affect the public debuts of rival social-media firms. “This may diminish the appetite somewhat,” she says.
From a big-picture perspective, BDO USA’s Graul stresses, the transaction was pretty successful. “This is a social-media company that had $3.7 billion in 2011 revenue and it just conducted a $16 billion IPO that valued the business at more than $100 billion,” he points out.
Still, it appears that the Facebook IPO is not going to open the gates to a flood of public market debuts, if it ever was. Facebook itself got out of the blocks last week, but with the major indices falling four of the five trading days, two other companies did not, according to Renaissance Capital of Greenwich, Connecticut. Cancer Genetics, which offers diagnostic tests tailored to a person’s genetic profile, postponed its $50 million offering, as did Hong Kong–based Loyalty Alliance Enterprise Corp. (LAEC). In the previous week, the LAEC, a mobile direct-marketing provider, had lowered the price of its $36 million offering.
Two issuers are expected to price this week: Corsair Components and Tria Beauty. Corsair designs and supplies personal computer gaming hardware components, and Tria markets laser devices for at-home hair removal. Both issues are under $100 million and are listing on Nasdaq.
Twenty-one companies have withdrawn IPOs this year, as of March 22, compared with 20 during the same time period in 2011, according to Renaissance Capital. At the same time, 47% of companies going public have done so at a discount to their initial offering range, compared with 35% last year. One-quarter have gone public at a price above their offering range versus 26% in 2011.
Facebook initially had a price range of $28 to $35 a share, but it upped the price to $34 to $38 a share in the days before the stock opened for trading.