It's Facebook IPO day! After months of SEC reviews and roadshows and profiteering, FB will finally take its place in the Nasdaq menagerie when markets open at 9:30 EST. Time to start digging up your backyard bullion stash, right? Wrong. For the average guy the Facebook IPO is strictly Like, don't touch.
IPO stands for Initial Public Offering which, in plain English, means a company putting itself on the stock market. Or, if you're in an antebellum mood, today is Facebook's debutante ball.
At its most fundamental level, an IPO is an opportunity for a company to raise lots and lots of money very quickly. In this case, Facebook will sell $16 billion worth of equity to outside investors a $38 per share, and will use that money to grow its business/buy yachts.
Just how big is that $16 billion? Very, extremely, ambitiously big. Facebook's is the largest tech IPO of all time, and by a long shot; the previous record-holder was Google, which raised a relatively paltry $1.4 billion back in 2004. In fact, Facebook's is the third-largest IPO ever by a US company, right behind Visa and GM.
Another thing an IPO does is to indicate how much a company is worth. In this case, Facebook, public company, is saying that its value is around $104 billion. Not bad for a company that managed a billion dollars of profit last year.
Sorry, almost definitely not. That $16 billion spend is likely already spoken for.
It's important to remember that lots and lots of shares of Facebook existed before the IPO. A year ago, a Goldman Sachs leak showed who owned how big a slice of the Facebook pie. This chart from Learnvest breaks it down nicely.
Two things from this: First, everyone on this chart just got very, very rich. The valuation at the time was $50 billion; today's more than doubles that. They're the ones who are seeing a major payday; everyone else is going to be gambling that Facebook stock takes off like Google did back in 2004. Basically what I'm saying is nice work, Sean Parker!
Second is that even if you wanted to take make that gamble, there's a long, long line ahead of you. An IPO is not a democratic process. The banks who helped Facebook decide how much it's worth, how many shares to offer, and at what price? They're not just in it for the (still very lucrative) commission. They also get first dibs in offering their big institutional clients—the Fidelities and Vanguards of the world—first dibs at shares in whatever the hot new offering is. And there hasn't been a hotter one than Facebook in years.
How bad is it? The AP points out that in a big IPO, institutional investors typically nab up to 90% of shares before Joe Investor can get involved. And chances are, there are plenty of Joe Investors with bigger wallets and better ins than you and I have. Shares will be available eventually, of course. Just as soon as the stock's risen enough that the big dogs feel comfortable cashing out.
Actually, maybe! But that depends on two things: timing, and your intentions.
Today is out of the question. It's going to be a pure bacchanal, institutional investors gorging themselves on inflated prices, then unloading shares on the way back down, using hopeful schlubs as their own personal vomitorium.
The near-term, too, is a little foggy. Facebook's early investors have already committed to selling off their shares in droves, which they wouldn't be doing if they thought the price was headed much higher than that $38 any time soon. It's a long list of people cashing in, but it's worth mentioning here: Accel Partners (49 million shares), DST Global (46 million shares), Mark Zuckerberg (30.2 million shares), Goldman Sachs (28.7 million shares), Tiger Global Management (23.4 million shares), Mail.ru Group (19.6 million shares), Peter Thiel (16.8 million shares), and a half a dozen others with relatively smaller stakes.
If any of them thought that Facebook's stock price was about to take off with Google-like velocity, they would not be selling so many shares, plain and simple. People like them are profiting off of people like you. Which they have every right to! But don't be the sucker on the other end of that deal.
So overall, no, not a good idea to dive in headfirst. That doesn't, though, mean that Facebook stock is poison. Just that today and the next several are going to be terrifically messy and in all likelihood not good for your checking account.
But if you think Facebook will continue to grow, that five and ten and fifteen years from now people will still be joining and sharing and clicking ads in the house Zuck built? Sure! After the price fluctuations die down and volume stabilizes, buy some shares. Then buy some more a few months later, and so on. At least you'll be back to even odds.
Or, you know, just buy a souvenir share and give it to your niece or something.
In the short term, it doesn't. At least not financially, not to you. You're on the sidelines while very wealthy people get very wealthier because they made a smart investment in an awkward kid with a hoodie and a dream. And good for them.
But in the long term, Facebook being a public company has potentially huge repercussions. Private companies have the luxury of running themselves however they want. They can focus on long-term strategy instead of short-term gain. Public companies, though, have to march in front of their shareholders every three months and explain how and why they made—or lost—so much of other people's money.
That kind of pressure can make a company lose sight of what made it so successful in the first place. Facebook, in particular, will be immediately under fire for not doing more to monetize each individual user. Its earnings are dramatically below its projections; if it doesn't find a way to grow quickly, it'll have hell to pay. For a company that's already prone to overreaching, that anger could be the spark that lights a powder keg of privacy and Open Graph concerns.
For now though, don't sweat it. Let your banker friends swoon over Facebook's operating income and cash flow. Raise a glass to Bono's huge payday. And get ready for Facebook's eventual assault on your wallet, a willing sacrifice to Mammon and Morgan Stanley.
Image credit: West McGowan/Flickr
This post has been modified from its original appearance on Gizmodo on Feb 1st.