Facebook's IPO price was right (maybe)
(MoneyWatch) COMMENTARY Facebook (FB) has seen a rash of complaints and criticism over its IPO. In addition to the technical problems that Nasdaq faced, which kept investors and traders from knowing for hours whether transactions went through, there has been the widespread feeling that the investment bankers got everything wrong. The stock was priced too high and never saw a big pop, so the institutional investors that bought at $38 a share couldn't make a profit.
However, new evidence from the Wall Street Journal suggests that, indeed, the major investment bankers who are being sued for alleged selective releases of information about Facebook's financial state - supposedly giving an advantage to some big inside customers - pretty much nailed the stock price where it should have been. What the complaints really come down to is that the stock wasn't under-priced enough, which would have given an advantage to big institutions at the expense of regular individual investors. But there is one big caveat: The new number depends on the participation of the very bankers that set the IPO price in the first place.
As both my MoneyWatch colleague Allan Roth and I said at the time, the IPO was a success and the bankers found the right price at $38. Value is a matter of perception, and in the market, a company's stock price is the one at which buyers and sellers agree to do business.
Yes, the stock dropped quickly after the IPO. Within its first month, Facebook became the third worst IPO in U.S. history among companies that brought in more than $1 billion. That brought the catcalls. Why? Because anyone who jumped on the stock early didn't see the typical jump in price that tech stocks usually bring. If the jump is big enough, an institution or investor can sell relatively high and make money immediately. But it also means that the company and insiders who are selling shares lose an opportunity to make more money they they would have if there had been a closer match between the stock price and what people were willing to spend. In other words, the big Wall Street players didn't get to pull out as much profit as they usually do, and that made them mad.
But companies and markets should be longer term than a few weeks. Now comes the news from the Wall Street Journal that the average analyst target for Facebook's share price is $37.71, or just about where it started. From that viewpoint, the market has decided after all that Facebook is worth what it said it was when the IPO started.
The big caveat is the entry of Morgan Stanley, J.P. Morgan Chase, and Goldman Sachs into the calculation. These three titans were the lead underwriters for Facebook, and so the companies that so many said had missed the boat in the first place. Securities laws and regulations prevent IPO underwriters from immediately offering opinions on the stocks that they helped launch.
Today was the first day that the trio could legally weight in after a quiet period. J.P. Morgan said the stock was worth $45 a share over the next 18 months; Goldman Sachs went with $42 for 12 months. Those are the highest estimates, which helped lift the overall average and, possibly, help boost public opinion of the stock. So it will take a while longer to really know whether those who bought Facebook were insightful, obtaining a value investment, or looking for a capital gains loss for their taxes.
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