Facebook already went public, you weren't invited
finance.fortune.cnn.com
finance.fortune.cnn.com
Once upon a time it was both an honor and a privilege to go public. A company worked tirelessly for years just to get to that point and it leapt at the opportunity to do so rather than playing it cool or blowing off bankers when they first came calling.
I'm sure we all remember the dot-com era internet companies who worked tirelessly for years to get a shot at the honor and privilege of an IPO. At least, I'm assuming that he's including these companies in his false-nostalgia, given that the two factors he blames for the loss of those halcyon days were the exchanges themselves going public (NASDAQ in 2002, NYSE in 2006) and the rise of HFT (which has really only grown to be a large part of the market since 2005).
And isn't it terrible that a company wouldn't blindly jump at going public the instant bankers came calling?
A comparison between Facebook today, pre-IPO, and almost any other company that is actually public on an exchange yields very little in the way of major differences
Where "major differences" would have been
1. Billions in capital, which of course private companies never had before the early 2000s.
2. Thousands of investors, where of course there's no major difference between a few thousand privileged wealthy investors and tens or hundreds of thousands of regular investors and qualification for inclusion in institutional portfolios, mutual funds, and indices.
3. A bump in analyst coverage, because the large armies of analysts that roved Wall Street in the good ol' days would for some reason only cover public companies. Oh, and also because there are already a ton of analysts covering Facebook, even though automated trading and exchanges going public killed all the analysts, or something.
Read Grahams intelligent investor with updating commentary the discussions of the various booms and hot companies at different periods is fascinating reading.
As for delaying going public and giving bankers the cold shoulder. MZ felt he could run the company better as a private firm. The dot com era is an example of companies and bankers trying to make a quick buck. Don't forgot it was followed by the dot com crash.
This has nothing to do with why Facebook didn't want to go public. The biggest reasons are (1) public reporting and data (2) the amount of effort would have defocused them at a critical time of growth (3) they could raise huge funds without it and (4) perverse incentives with large institutional investors, often their largest shareholders.
"Consider that the very hot IPO’, such as Facebook, are purchased by the underwriters before the public has even gotten a chance to get in. Underwriters are the big banks such as Goldman Sachs, Morgan Stanley, etc., and the shares they purchase go to their best clients first. This includes hedge funds, large institutions and huge money managers, not the majority of individual investors. "
"After the opening day, when the stock goes public and begins trading, most average investors can go in and buy shares at the trading price. But the opening day “pop” is over, and that is where the money is at, before the general public has had a chance." (from http://finance.yahoo.com/news/facebook-ipo-etfs-180025693.ht... )
Unlike google's IPO which was a dutch auction, if the general public wants to make good money in facebook's IPO, they're out of luck.
The game that wall street plays with regards to IPO is simple: I'll let you buy in most of your shares at 10 dollars if you will buy a few shares at 20 dollars when the IPO opens. This way, the average price is much closer to 10 dollars, yet it convinces others to participate in the IPO trade.
As far as the companies are concerned, the runners ensure that there is institutional demand before the IPO goes public, to ensure that the company can actually sell the requested number of shares. It's much easier to follow Wall Street's rules (and leverage their capital relationships) than to stake out on your own (essentially what google did).
In retrospect, Google the firm paid dearly, as was evidenced by the resulting price rise.
At the end of the day, the company needs to receive cash from somewhere and the banks don't want to carry the risk, so they offload it to their customers (who front the cash), and they essentially offload it to the public.
Wait, what? He spends a couple of paragraphs decrying liquidity in markets, and then calls this a bad thing.
The end result is that companies come public and struggle for analyst coverage, their shares are whipped about by robot traders and the whims of whatever index ETF basket they happen to be assigned to. The regulation surrounding the reporting of accurate and timely information to their public shareholders has become so onerous and expensive that they've essentially clammed up, offering only the most terse and lawyer-approved updates on their business as infrequently as they can.
I don't understand what's happening in this part, except that the author doesn't like it. Can someone explain more slowly and less angrily?
His rant about HFT seems misplaced : The market rules allow for robotic trades that whittle the bid-ask spread down to wafer-thin margins. Investors generally benefit from the greater liquidity and lower transaction spreads - compared to the situation before the minimum price increment was set so low.
But he may have a (related) point when he complains that the bid-ask spread is now determined by machines (and is driven to zero) : Previously, stockbroking/marketmaking was a much more cozy operation, since there was a minimum spread that gave the occupation a base-line profitability. That's gone now. What's also been swept away is the research function that market-making (sellside) firms once provided as part of the service. There's less margin trading a single share, so there's much less incentive to try and get clients to trade those shares with you : Much better to get them to trade more exotic products...
Also, regulations have stopped sell-side research people getting paid for the investment banking (money raising) part of the business. Previously, research people would follow a wide universe of stocks, and then use that as a wedge to get the (lucrative) investment banking business for their firm - think of it as salary for stock recommendations, bonus for banking. Now the cross-pollination thing is illegal, and what's basically happened is that any half-decent stock analyst gets hired away from the sellside firm by hedge-funds (where they can get paid doing what they love).
Another element (the regulation FD, and Sarbanes-Oxley) part increase the cost of being a listed company for the companies themselves. RegFD means that they have to tell investors any news simultaneously (on the face of it a good thing, since it makes it clear that inside-information, or front-runnable information/whispers are a no-no). However the way it is implemented makes it a lawyer-infested process to release any information. Walking past a CFO in the street and asking "How's it going?" now results in "You need to speak to my Investor Relations department". And that transition now means that information is less timely and less comprehensive information (since the IR people are incentivized to be cautious, rather than help investors understand the underlying business).
Sarb-Ox was also regulation founded on good intentions : The Board/CEO has to represent that the investor communications are full and fair (my understanding) - with the downside of going to jail. The downsides are two-fold (1) the most secure way of communicating for a CEO is to say "Here are the audited financials, I'm not saying a word more", and (2) the people that this was intended to prevent from scamming the public are largely unaffected (since they live in a world of scamming and lying anyway : what does an extra law against it matter?)
Anyway : The basic (IMHO correct) ideas revolve around the unintended consequences of new regulations [that are almost always devised to tackle the last catastrophe rather than anticipate the next ones]. The rant about HFT seemed out-of-place.
Put another way: When was there a market where something like FB -- explosively grown, headline potential for more, profitable -- could _not_ have raised substantial private capital?
In that respect, Facebook went "public" privately last year when Goldman invested at $50B valuation.
The broader point or context poorly laid out is that businesses don't have to go through the same amount of public hoops that they used to raise the same kind of "public" levels of capital.
Also, correct me if I'm wrong but I believe Facebook has only sold shares publicly on a fairly small portion of its huge valuation so in a sense you might argue that valuation hasn't tested that much.
Take a look at this
"At least, I'm assuming that he's including these companies in his false-nostalgia..." - great assumption
"Where "major differences" would have been" - You seem to be reinforcing the authors point here.
"This has nothing to do with why Facebook didn't want to go public." - You totally missed the authors point here.
"He spends a couple of paragraphs decrying liquidity in markets, and then calls this a bad thing." -You might want to check the definition of decrying.
It's alright, I wasn't even slightly interested.
"You weren't invited"
It's alright, I woulda farted on your invitation.