Facebook's IPO (2012)
Facebook went public on Nasdaq on 18 May 2012 in one of the biggest tech IPOs ever. Demand was huge, but the stock barely held its IPO price on day one and then fell sharply.
Key numbers
- ● IPO price: $38 per share
- ● Raised: about $16bn (about $6.8bn went to Facebook itself, the rest to selling shareholders)
- ● Valuation at IPO: about $104bn
- ● Low: $17.55 (4 September 2012)
- ● Back above $38: first traded above it on 31 July 2013, first closed above it on 2 August 2013
The background
By early 2012 Facebook had 901 million monthly users and made most of its money from advertising. It also had little choice about going public: US rules meant that once a company had more than 500 shareholders of record, it had to publish its accounts anyway. Listing let early investors and employees sell shares and gave Facebook a stock it could use for acquisitions.
The deal
Morgan Stanley led the IPO using book-building: banks gather orders from big investors and use that demand to set the price. Demand looked so strong that the range was raised from $28-35 to $34-38, and the number of shares was increased by about 25%. The shares priced at $38 on 17 May 2012, raising about $16bn and valuing Facebook at about $104bn, roughly 100 times its 2011 profit of about $1bn. Only about $6.8bn of the money went to Facebook (primary shares). The rest went to existing shareholders selling their stakes (secondary shares).
What happened
Trading opened about 30 minutes late on 18 May because of problems at Nasdaq, and the stock closed at $38.23. The underwriters had to buy shares to stop it falling below $38, using the greenshoe option. Within weeks the price slid, hitting $17.55 on 4 September. Investors worried that users were moving to phones, where Facebook showed very few ads. Mobile advertising then grew quickly, and the stock traded back above $38 on 31 July 2013.
The takeaway
IPO pricing is a trade-off. A higher price raises more money but leaves less upside for new investors. By raising both the price and the share count, Facebook filled almost all the demand upfront, so there were few buyers left after listing. At about 100 times earnings, the price also depended entirely on future growth, so any doubt about that growth hit the shares hard.
The numbers behind it
Valuation at IPO: about $104bn, roughly 100x 2011 net profit of about $1bn
Money raised: about $16bn, of which about $6.8bn was primary (to Facebook) and the rest secondary (to selling shareholders)
Pricing: range raised from $28-35 to $34-38, and shares offered increased by about 25%
First day: closed at $38.23, almost flat on the $38 IPO price, with underwriters supporting the price
Low point: $17.55 in September 2012, about 54% below the IPO price
DCF angle: at 100x earnings, almost all the value sits in long-term growth assumptions, so doubts about mobile advertising hit the price hard
Why it matters
A hot IPO is not always a good investment. The price range and share count were raised just before pricing, and trading glitches on the day hurt confidence. The stock recovered later as the business kept growing.
Interview angle
Be ready to explain how an IPO is priced (book-building) and why the first-day pop matters. Likely question: Was Facebook's IPO a success for the company, for investors, or both?
Educational only, not financial advice.
Quick quiz
1 / 3Facebook raised both its price range and the number of shares just before pricing. What was the main risk of doing both?