The hotly anticipated and long-awaited Facebook IPO is to officially start moving this week. Credible sources suggest the social media behemoth could be filing its intention to float with the Securities and Exchange Commission (SEC) as soon as Wednesday.
This would suggest a share sale launch in May this year which could raise as much as $10bn for the social media company which is used by 800 million people across the globe (one eleventh of the World’s population). To put this enormous figure likely to be raised into context, a little known search engine called Google raised $1.9bn in its own IPO in 2004.
This news of the floatation will no doubt have institutions rubbing their hands with glee at the prospect of getting hold of stock in the offering, so long as the price is right.
If the offering price is too high, the company and its underwriters risk burning IPO investors.
Once Facebook begins trading the market will have its say on the true value of each Facebook share. If it deems the correct price to be less than the IPO price then investors are effectively left in negative equity. A recent high profile example of this is Groupon, which priced its IPO in November last year at $20 a share, but its shares fell as much as 26 percent in the first two weeks of trading. Its stock remains below $20 and investors are left hoping the company will prosper and return value in the long term.
On the other hand if the price is set too low, the stock issuer risks leaving money on the table; great for IPO investors, but bad for Facebook and the stock issuers. LinkedIn, which raised $353 million last May in an IPO priced at $45 a share, saw its stock soar as high as $122.70 on the first day of trading. Its shares have since drifted down to around $70 range, but the price range to date indicates that the company could have raised another $440 million to $1 billion in extra money if the IPO were priced more aggressively.
So it will therefore be interesting to follow the first few days of trading in May (assuming May is when they do list) to see whether Facebook and its Wall Street advisors (which are yet to be confirmed) will set the price right and avoid a third mispriced social media IPO in less than a year. I’m sure that Facebook would rather slightly under price to allow for a positive market reaction and momentum, than over price and risk another Groupon situation. If this is the case then those financial institutions that get their hands on the stock will make, to coin a phrase, some serious dollar.