So, if I understand you correctly, the owners' goal is to set the IPO price as high as possible and then to hell with the future stock price? I was always under the impression that the owners' goal is long-term growth of stock value, but of course I'm not an economist ...
The owner(s) of the company only gets paid at the IPO. That's the only time he gets money from the stock market (unless and until the company issues more stock later).
So of course he wants the IPO price to be as high as possible, because that's the money he gets to put in his piggy bank.
In fact, the real goal of a public company is not to increase the stock price, but to maximize the value of the stock to shareholders. In some cases, this means maintaining a flat stock price but paying healthy dividends (in other words, giving some of the profits to the shareholders). This was actually the dominant model for many years (link below, take a look at the growth rate during the '70s and '80s).
The somewhat more recent trend toward increasing share prices is just another way of maximizing shareholder value. In this case, it is done by increasing the market value of the stock being held by the shareholders.
It is quite common for companies today to pay no dividends. Since the shareholders don't get a piece of the profits, the only way to make money on the stock is to buy low and sell high (or buy low and hold for awhile, perhaps until retirement, and then sell, however you want to look at it).
So there really isn't any intrinsic reason for a company to seek a higher stock price. The point is to maximize value, which doesn't always equate to price.
Of course that isn't going to cheer up people who hoped to buy FB on Friday and flip it for a huge profit this week after the "bump". But risk is the whole reason there's money to be made. Sometimes you win, sometimes you don't.
What? This is completely wrong. The owners don't completely cash out at the IPO. I don't know exactly how much Zuck ended up selling at the IPO, but after some quick googling I found an article from a couple of weeks ago stating
Zuckerberg, who holds a total of 533.8 million shares, would sell 30.2 million shares in the IPO — garnering about $1.05 billion in cash at the high end of the proposed price range of $28- $35 for the sale of shares.
So in otherwords Zuckerberg is worth $1 billion in cash and has 534 million shares of FB. If FB goes to zero before he sells the rest of his stock on the market, his net worth drops by something like $19 billion.
It's not completely wrong. I never said the owners cash out entirely. But in terms of the company raising money, the IPO is pretty much it.
Perhaps I was a little too loose with my terminology though, to the point of being confusing. Instead of "owner" I should have said "company" in that paragraph.
You said: The owner(s) of the company only gets paid at the IPO. That's the only time he gets money from the stock market (unless and until the company issues more stock later).
This is totally false. They get paid anytime they sell stock. They sell some stock at IPO and get paid some then. It's by no means the only time they ever sell stock and definitely not the only time they get paid by the market.
Ok, I'm obviously over-simplifying the situation, but I have hard time believing that stock price doesn't matter. If nothing else, then downward trend would generate lots of negative press and customers might turn away from the company's products/services. Imagine if Google's stock price would decline significantly in the period of next year or two - wouldn't that spell doom and gloom in people's eyes?
Disclaimer: I have never invested in any company, never bought any stock, so you may call me naive.
That's true, to a point. If Google's stock price fell off a cliff tomorrow it would be all over the news and their customers (advertisers) might have some questions. But there are two things to keep in mind:
1) If their stock price fell off a cliff, there's got to be a reason. It could be basically anything, but it has to exist and be well-known (maybe Larry Page had a breakdown, shaved his head and tried to run down some reporters, whatever). The event that caused stockholders to sell (thus crashing the stock) probably would have been enough to cause Google's customers to ask questions, the stock price is then just incidental. It's a "chicken and egg" problem in some sense.
2) Stock price really doesn't have any impact on the everyday functioning of an otherwise-healthy company. Stock price is a reflection of the buying and selling happening on the stock market, so fluctuations in price can actually have nothing to do with the current health of the company in question. Maybe tomorrow a report comes out that indicates search-based advertising will start to decline next year and will be half what is today in 2020. This would likely lead to a decrease in Google's stock price. But it probably wouldn't lead to many companies dumping Adsense, at least not yet. A report about the future affects the stock price, but it doesn't necessarily affect the customers today.
Stock prices are abstract and largely disconnected from the actual company. So while a good CEO will pay attention to the stock price, it just isn't all that important for most (especially mature) companies. Building a healthy business is the important part.
In general, if a company’s stock goes way down and that decline is attributable to bad management, then some entrepreneur can gather together a bunch of investors and say “I can run that company better than the yoinks that currently occupy the boardroom. Loan me enough money to buy up 51% of those undervalued shares, and when I take over and turn the company around, the appreciated stock will make us all rich. ”
However, FB Inc. is structured so that Zuck will retain a majority of the voting rights, even if every other investor stands against him (http://www.slate.com/articles/business/moneybox/2012/02/face...), so even if the price goes down to a dollar a share, investors’ only recourse will be to sell before it drops to fifty cents.
>Imagine if Google's stock price would decline significantly in the period of next year or two - wouldn't that spell doom and gloom in people's eyes?
Would you stop Googling things because you read a news story about their stock price declining?
(Caveat: There's some economic work that models real-world feedback from irrational "noise" trading. If you're interested in learning more I'd start with Subrahmanyam & Titman's 2001 "Feedback to Cash Flows.")
no different to raising a Series A or B. Facebook have so much cash now that they will likely never go back to the market again. They raised an extraordinary amount of money at a very large valuation.
They also have over 50% of voting control with one person so don't need to really deal with shareholders. The only single downside is employee option values and incentive packages.
Edit: to add to that, there is also a strong school of thought amongst investors that companies and CEO's who track daily, monthly, quarterly etc. stock fluctuations (ie. short term) are a lot less effective than those who ignore the short-term movements. Facebook said as much in their S1, and Zuck in his letter, that he won't be following the stock or dealing with the market, but will rather focus on building the company long-term.
>to add to that, there is also a strong school of thought amongst investors that companies and CEO's who track daily, monthly, quarterly etc. stock fluctuations (ie. short term) are a lot less effective than those who ignore the short-term movements. Facebook said as much in their S1, and Zuck in his letter, that he won't be following the stock or dealing with the market, but will rather focus on building the company long-term.
Yes, this is much closer to my thinking and that's why I called you out on your argument.
to clarify, he only doesn't care about the price after he has sold billions of dollars worth of stock. until Friday, he definitely cared (to the point of borrowing money to buy a house so he wouldn't have to sell an extra share).
They watched as all the other tech IPO's of the time had the large pop in the first day of trading. that incease in price goes to the banks and the company "misses out" (since fair value was higher in the public market).
Google tried to minimize that pop by ditching the traditional underwriting style and roadshow and instead implementing a dutch auction for pre-IPO shares. the banks were so upset at google attempt to sideline them from the process that they ended up colluding with each other (allegedly) to fix the price.
(The process was that after the roadshow, each bank would submit a sealed bid with their price and purchase allocation. The auction system[1] worked by allocating by highest price and allocation backwards until the entire allocation was sold. Somehow most of the banks bid within a few dollars of each other and at a price that was below even the lowest price estimates).
Price ended up popping in the first day, week, month, Google missed out anyway.
Facebook co-opted a number of underwriters and was in a position to leverage itself a good deal (1.5% fees instead of 5-7%), did a large roadshow and took orders the traditional way. Because they pitched the stock so well they both got a higher price than expected and also raised and sold a lot more shares than was expected.
They ended up doing what Google tried to do but without the arrogance (I guess you could say that). the underwriters for Facebook got a raw deal, they had their fees slashed, they had to share their fees with a group of other underwriters (there is usually one main and 2-3 secondaries, this deal had morgan stanley as a lead and heaps of others). They ended up sharing $175M in fees and have underwritten billions in stock and have today seen 10% of their position wiped out.
credit should go to David Ebersman, the CFO - he planned and organized the whole thing and apparently wrote all the filing docs himself. turned out to be a great and critical hire
The value placed on FB was absurd to the extreme.