Facebook IPO a Failure? Not So Fast.

Justin Daab

So, why does any company go public? Basically, to raise capital (cash) and to determine an accurate, market-based share value. I’d like to say that measuring against those two criteria, the Facebook IPO was a huge success — for Facebook (NASDAQ: FB), even if it was a disaster for the investment banks, their customers and the NASDAQ.
So let’s evaluate the Facebook IPO against the first criteria. Priced at $38 for the opening bell… (or actually about a half an hour after, due to NASDAQ snafus) Facebook raised some $16 billion. That’s the largest tech IPO and third largest IPO overall in US history. Sure it began to drop almost immediately after. But that means the investors “privileged” enough to get in on the initial sales through their investment banks started losing money immediately, but make no mistake, Facebook’s cash diminished not at all. That being said, on count one…not a failure for Facebook.

So then, on the second point — determining the real value of a share of equity in Facebook. Again, the market determines “fair.” Not the investment banks. One might cry “but the internal shareholders were hurt by their equity losing value.” I would argue, it was “value” that never really existed. So in the second count of determining value: at whatever price the market settled, that is unquestionably “fair.” Again, not a failure for Facebook.

So just for whom was this IPO a failure? Well, easily for the institutional investors like pension funds, mutual funds who were sold a bill of goods as to the predicted initial trajectory of the stock price after the initial offering. NASDAQ has egg on its face for sure due to the technical failures that delayed the trading of FB stock. But what about Morgan Stanley? They were charged with helping Facebook get the maximum value of their offering, and it appears they did an excellent job of that. However, given the potential souring of the entire IPO market after Facebook’s performance, it could hurt their business prospects for the near term.

So as of this writing, Facebook stock is trading at $26.82 — 70% of its IPO price and just 59% of its momentary first day high of $45. Lower than expected, to be sure, but with $16 billion of free cash in the war chest, there’s no telling what Facebook will build/acquire to improve their value. That seems pretty successful to me. So what do you think?


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