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tips & t
Less is more
Lessons from Facebook’s failed IPO
QBY LENA BOOTH, PH.D.
uestions remain
nearly one year
after the frenzy
of Facebook’s
initial public offering on
May 18, 2012.
Who pushed for the inflated
$38 price? Who had
the ear of Chairman and
CEO Mark Zuckerberg in
the days before his NAS-
DAQ debut?
When exactly did
Morgan Stanley, the lead
underwriter, revise Facebook’s
earnings forecast
downward? Who did
Morgan Stanley warn right
before the mandatory
quiet period surrounding
the IPO?
Perhaps the biggest question
is whether Facebook
shares will ever climb
back to $38. (Prices closed
below $28 on March 1,
2013, after hitting a low of
$17.55 six months earlier.)
Some answers might
emerge in the various
lawsuits against Facebook
and its underwriters. In the
meantime, entrepreneurs
and angel investors watching
from the sidelines can
learn from the debacle.
For starters, the Facebook
Lena Booth, Ph.D.
case shows what can go
wrong when the original
owners get too greedy on
the first day of trading.
Although company
founders, venture capitalists
and other financial
backers want a big payday,
these shareholders are
often prevented from cashing
out during a lockup
period that typically lasts
six months to one year.
A good price at the end
of the lockup is what matters,
and experience shows
the best way to build momentum
toward this target
is through strategic IPO
underpricing.
Underpricing by as much
as 15 percent to 20 percent
creates excitement, generates
free publicity for the
company and increases
trading volume. Underpricing
also wards off lawsuits
from angry investors who
bought at the IPO.
When McDonald’s spun
off Chipotle Mexican Grill
in 2006, shares doubled
from $22 to $44 on the
first day. The resulting hype
elevated Chipotle’s public
image. LinkedIn experienced
the same price hike
in 2011, with share price
rising 109 percent on the
first day of trading.
In contrast, Facebook
shares dropped to $31
within the first week, and
the resulting fallout likely
dampened Zuckerberg’s
honeymoon with his new
bride in Rome.
Lena Booth, Ph.D., is an
associate professor of finance
at Thunderbird. She served
as the first executive director
of the Thunderbird Private
Equity Center, and specializes
in corporate finance, capital
raising, investment banking
and financial markets.
42 spring 2013