I would like to expand on my Five Lessons from the Facebook
Fiasco IPO. Lesson 2 is there is a reason why IPOs have been done in a way which gets a 20% or so first day pop. It is not banker greed nor giving a free benefit to the institutional buyers (who can flip part of their position during the pop). It is to build a book of long-term holders and create momentum for the stock. LinkedIn did this well, and has continued to out-perform each quarter, providing a strong base to its stock price and improving access to capital markets for future financing.
The primary rebuttal I hear is that a pop means the company is leaving money on the table, and wasn’t it smart for FB to get all they could in to the company? Well, not in this offering. Of the 420 million shares offered, the majority (240M) were for insiders not the company. They got the windfall. The company sold 180 million shares gaining close to $7B. The greenshoe issued another 63M shares, but wouldn’t have added to the company’s coffers, for 243 million shares of dilution.
Let’s play alternative history. A counter-factual scenario is FB first sells 100M shares with no selling shareholders at a lower-priced IPO, say $32. Likely the stock would have risen to the $44 range where it was selling in the private secondary markets prior to the IPO, and in the middle of the range at which it opened during its IPO. The many fewer shares floated would have made a pop much more likely. Then it would do a fast secondary offering at the higher price, say another 100M shares at $44. The company would have floated 200M shares and pulled in more than $7B. The secondary offering would have added selling shareholders. In the end, even with the ‘shoe, the dilution would have been less and the company proceeds higher.