Sixteen Billion: Facebook Goes Public

On Friday, Facebook went public, and the largest technology initial public offering in history produced the flattest debut of the social wave. The shares priced at thirty eight dollars, the top of the range, and the company raised sixteen billion dollars at a valuation near one hundred four billion. The stock opened at forty two dollars and five cents, spent the day drifting near the offering price, and closed at thirty eight twenty three, up less than one percent. The Nasdaq's systems failed around the debut, and the underwriters were said to have supported the price. This is the May 2012 story, and the story is the lesson: ...

Sixteen Billion is the subject of this article: the biggest initial public offering in the history of technology, and the debut that refused to pop. The offering is the anchor, the flat close is the surprise, and the lesson is about the difference between the size of a company and the mood of a market.

1. The Day

The day had been planned for months, and the plan had been perfect. Facebook priced at thirty eight dollars on Thursday evening, the top of the range that the bankers had set, and the pricing alone was a statement: the demand was there, the valuation was there, and the offering would be the largest in the history of the technology industry. The company raised sixteen billion dollars, and the valuation approached one hundred four billion dollars, a number that made Facebook more valuable at its debut than most of the companies in the S&P 500. The stage was set for a celebration. The market had other plans.

The stock opened at forty two dollars and five cents, a ten percent pop that looked like the start of the usual story. Then the story stalled. The shares spent the day drifting back toward the offering price, the momentum faded with every hour, and the close came at thirty eight twenty three, up less than one percent. The pop had evaporated, and the debut had become the flattest of the social wave. The bankers called it a success, and the success was real: the company had raised the money, the early investors had their exit, and the valuation had held.

2. The Hype

The hype had been building for years, and the hype had no precedent. Facebook had eight hundred forty five million monthly active users at the end of 2011, a number that was approaching the population of the developed world, and the users were the story. The company had filed its S-1 in February, and the filing had been read like scripture, with the numbers parsed in every financial newsroom on earth. The revenue of three point seven one billion dollars in 2011, up eighty eight percent, and the net income of one billion dollars, were the numbers that made the valuation feel almost reasonable.

The anticipation had been manufactured with skill. The roadshow had been a parade, the press had been managed, and the bankers had set the price at the top of the range because the demand had been overwhelming. The mutual funds, the hedge funds, and the retail investors all wanted in, and the allocation was the prize of the season. The mood was the mood of a market that believed the future had been priced in and the future was even bigger. The hype was the product, and the product was the belief. The belief would meet the market on Friday.

3. The Numbers

The numbers in the prospectus were the foundation of the valuation. The company had eight hundred forty five million monthly active users as of December 31, 2011, and four hundred eighty three million daily active users, and the users were the asset that no other company could match. The revenue of three point seven one billion dollars, up eighty eight percent from the previous year, was the proof that the users could be monetized, and the net income of one billion dollars was the proof that the machine could make money. The advertising was about eighty five percent of the revenue, and the advertising was growing.

The risks were in the same document, and the risks were equally clear. The company had hundreds of millions of mobile users, and no mobile advertising, and the shift of the world to phones was the threat at the center of the offering. The dependence on the news feed, the game the company played with its own users, and the dual-class share structure that gave Zuckerberg control, were all disclosed. The filing was honest about the risks, and the honesty was the reason the market could price the stock at all. The first day of trading would begin to answer the question.

4. The Nasdaq Mess

The debut was marred by a technical disaster, and the disaster was visible to the world. The Nasdaq's systems failed on the morning of the offering: the open was delayed by roughly thirty minutes, and the order confirmations failed for traders who had placed orders during the delay. The market makers did not know which orders had executed, the traders did not know what they owned, and the confusion lasted for hours. The exchange issued apologies, the regulators opened inquiries, and the offering that was supposed to be the triumph of the new economy became a case study in the fragility of the market's plumbing.

The timing made the failure worse. The traders who had expected to sell their allocations into the pop found themselves unable to confirm their positions, and the confusion fed the caution. The exchange's systems had been tested, the exchange said, and the testing had not been enough. The failure was a reminder that the machinery of the markets was older than the companies that listed on them, and that the biggest offering in history had stressed the machinery past its limits. The Nasdaq mess became part of the story of the day, and the story of the day was already flat.

5. The Support

The reports of the day included a detail that the company did not confirm and the analysts repeated: the underwriters, led by Morgan Stanley, were said to have bought stock to support the price. The practice is normal in large offerings, the support is meant to smooth the trading, and the support is usually invisible. On Friday, the support was the subject of speculation, because the price kept touching the offering price and the buyers kept appearing. The reports described a bank that was supporting the stock while the sellers were selling, and the image was of a battle between the underwriters and the market.

The support, if it happened, was a sign of trouble. The underwriters support a stock when the demand is softer than expected, and the support is a bridge to the moment when the market finds its own level. The reports of the buying were the reports of the gap between the offering price and the market's mood, and the gap was the flat debut. The analysts who had set their targets above the price were revising their notes by Monday, and the revision was the confirmation that the support had not been enough. The market had spoken, and the market had said: too much, too fast, too soon.

6. The Wave Ends

The context of the debut was the social wave, and the wave had a pattern. LinkedIn had gone public in May 2011 and closed its first day up more than one hundred percent, a pop that had made the froth look like gravity. Groupon had closed up about thirty percent in November, and Zynga had closed down five percent in December, the first crack in the pattern. The wave had been lifting every social offering, and the wave had been getting weaker with every offering. Facebook was the biggest of them all, and Facebook was the flattest of them all.

The contrast with Google made the point sharper. Google had gone public in 2004 at eighty five dollars, the offering had been deliberately underpriced, and the stock had doubled within months. The Google debut had been the start of a long climb, and the Facebook debut had been a flat line. The difference was the difference between a company that was underpriced and a company that was priced for perfection. The social wave had taught the market to expect pops, and the market had stopped expecting. The biggest company in the wave had met the market's new mood, and the new mood was caution.

7. The Monday Fall

The stock fell below its offering price on the first trading day after the debut, closing near thirty four dollars, and the fall erased the last of the day one optimism. The analysts cut their price targets, the headlines asked whether Facebook had been overpriced, and the debate that had been polite during the roadshow turned sharp. The valuation of one hundred four billion dollars implied a price to earnings ratio that even the bulls called rich, and the market was now doing the arithmetic in public. The stock was trading on the fundamentals, and the fundamentals were the problem.

The fall was the answer to the question the offering had raised. The question had been whether the market would pay for the story, and the answer, after the first full day of normal trading, was that the market would pay less than the story. The users were real, the revenue was real, and the growth was real, and the stock was still falling, because the price had been set for a future that the market no longer believed would arrive on schedule. The mobile problem, the news feed problem, and the valuation problem were all the same problem: the price had been perfect, and the world was not.

8. The Lesson

The lesson of the Facebook week is that the size of a company is not the mood of a market. The offering was the largest in the history of technology, the company was the most important in the history of social media, and the debut was flat. The size had been priced in, the growth had been priced in, and the perfection had been priced in, and the market had decided that perfection was the risk. The flattest debut of the social wave was the debut of the biggest company in the wave, and the coincidence was not a coincidence.

The second lesson is about the difference between an offering and a company. The offering is a day, and the company is a decade, and the day is not the verdict. Facebook had raised sixteen billion dollars, the founders had their exit, and the company had the capital to build the mobile business it had disclosed as its risk. The flat debut was the market's opinion, and the opinion would change as the numbers changed. Sixteen Billion is the May 2012 story, and the story is the lesson: the biggest offering in history is still just an offering, and the market keeps score in its own time.

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