It appears that 57% of the stock offerred in the IPO came from insiders, which is a very different thing. Pretty shoddy reporting.
I love how he fails to consider that the underwriters and Facebook might have different financial interests. The higher the offer price the more money Facebook makes and the less money the underwriters make.
"First, Facebook insiders chose to sell a ridiculous amount of their shares relative to the last major Internet-related IPO, Google. When Google went public, insiders dumped 28% of their shares. Facebook insiders, on the other hand, sold 57% of their shares on Friday."
Comparing two data points isn't exactly rigorous argument. Maybe 28% is low for Google. What is the average? An actual article on this would be interesting. A paragraph in some dude's blog? Pointless.
And really, the correct phrasing should be: "57% of the Facebook stock being offered in the IPO is coming from insiders selling shares."
When my dad asks if he thinks he should buy some Facebook stock, I can tell him the IPO was more about allowing insiders to sell their stock than raise capital. Red flag
However, coming from a value investment and algorithmic asset valuation background I explained the problem to them this way:
A Honda Civic is a great car at $20k? Yes.
Is a Honda Civic a good car at $90k? Probably not.
Could you find someone to buy it at that price? Probably.
Should you buy it at that point? That's what buying FB at a $110bn valuation is.
It's still a great car but I'm not going to buy it for that price.
You don't understand the IPO process.
Normally, it is a company with more opportunity than capital. So it creates additional shares and then sells it during the IPO. This process is just like raising capital with VCs, except the term sheet is effectively between the new investors and the company, with the SEC adding all sorts of post-its with additional conditions.
Only since bubble v1 was it seen as some sort of "achievement" for a company; An IPO is nothing more than a poor company begging for money and willing to cause dilution in order to fill its tin cup.
>Normally, it is a company with more opportunity than capital.
Although this was of course the original rational for IPOs, this looks more and more like a historical footnote these days. Now that so many IPOs are late-stage it's hard to see them as anything other than liquidity events for founders and investors and employees.
Ahem. Like I said,
>If you don't need a large infusion of capital,
It's my money and I need it now!
Employees know what deals are on the table waiting to close, and new product announcements, and all sorts of things related to the stock.
If they think the stock is going to double in the next 6 months, do you still think they'd sell? Even if they say "It's my money and I need it now!" brokers would be happy to offer a loan using the shares as collateral for any immediate money needs.
If somebody is selling, they don't think the shares are about to double, plain and simple.
Again: If you know the stock is about to double, you go get a loan against the shares. Sellers do not believe this.
The reason lies on the technical shores of the federal securities laws. The
Securities Exchange Act of 1934 sets forth certain requirements for companies to
register their shares with the S.E.C.
Specifically, Section 12(g) requires that a company register its securities with
the S.E.C. if it “has total assets exceeding $1,000,000 and a class of equity
security … held of record by five hundred or more … persons…”
Facebook sold X shares for the IPO.
Y shares were created for the sale.
Z shares were sold from the insiders pool.
Obviously: X = Y + Z.
The headline says: Z = 0.57 * X
In old-fashioned days (when companies paid weird things like dividends), it was seen as profoundly bad for employees to dump this much stock during the IPO. Usually, employees who think the stock is about to double because of a revenue/earnings ramp would not be so eager to part with their shares.
The IPO was the big chance for people with equity in Facebook to finally cash out and actually make some money off of the company.
They could've maybe waited a little, for the sake of perception.