Last Friday, I spoke with Espen Robak, the president of Pluris Valuation Advisors and an expert on valuing large private companies, just minutes before Facebook's stock was scheduled to trade publicly for the first time ever.
You know what happened next: Glitch, snitch, and flop went the IPO. What the heck happened? I caught up with Robak for the post-mortem of the public offering. Here's an edited transcript:
Well, that was disappointing. Has the Facebook IPO fallout shocked you?
I wouldn't say I'm terribly surprised. This was always an uncertain valuation and an uncertain investment. And the stock price hasn't really moved that much, when you think about how much of a crap-shoot this valuation was going to be. That would be my take.
That's a pretty calm reaction for the biggest tech IPO of all time falling 25 percent from its opening price!
Well, obviously, most people were assuming that Morgan Stanley and Facebook would have managed the IPO price to produce much more of a pop for it to continue trading up. But this is not easy to guess. You look at what happened to LinkedIn, which popped more than 100%, and that was clearly a substantial undervaluation.
You said Friday that private Facebook stock was trading in the low 40s in the secondary market, and that those investors probably expected the stock to be in the low-50s in six months. Explain that again to me.
When you buy something that you know is going to be illiquid -- and these people couldn't trade Facebook stock for 180 days after the IPO -- you want to give it a little bit of a haircut. The people who bought private Facebook stock in the 40s were buying illiquid stock. They thought the so-called "fully liquid" version would be worth significantly more. That would take you into the low 50s. But actually, the price of privately traded Facebook shares went a little down before the IPO.
But by and large, most of the transactions in April were in the low 40s. So, yes, you would expect that these investors were unpleasantly surprised.
I'm reading some very smart economic writers who're blasting Facebook and the banks for letting big institutional traders gobble up all the value in Facebook, then setting the IPO price too high, and then screwing over retail investors who bought stock at $42 at the opening and immediately saw their investment fall by 25%.
But after LinkedIn's IPO, I read some very smart economic writers who blasted the banks for setting the IPO price too low and for screwing over the entrepreneurs.
I'm really happy you said that, because I've had the same idea. This is an interesting thought experiment. What if Facebook had popped. What if Facebook debuted at $15 and popped to $35? Nobody would be complaining about the forecasts, or the Nasdaq glitch, the various things that went on. The CFO of Facebook, the analysts at Morgan Stanley, the tech guys at Nasdaq -- none of them would be in hot water now. So it reemphasizes for me that the IPO process is a somewhat delicate undertaking for everybody: for the company, for the underwriters, for everybody involved. Ideally you want to be right, but it pays to be low.
What do you think about the current accusations that Facebook leaked information to their underwriters, who shared it exclusively with big investors?
I have no idea. It's really not my place to say.
Is it fair to say we were all too optimistic a week ago?
I think people might have been over-excited about it, yes. It's not easy to price private companies since so much of the value is dependent on things that are going to happen in a year. The very nature of a company like this is highly speculative.