In Facebook IPO fiasco the 'smart money' got burnt

In Facebook IPO fiasco the 'smart money' got burnt

Summary: Small investors snubbed the Facebook IPO. It's the 'smart money' that's crying.

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TOPICS: Start-Ups
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There's a lot of anger around the botched IPO of Facebook but much of that is from the "smart money" that wasn't able to convince retail investors, the regular people who invest in stocks, to take their shares.

The point of a "pop" in an IPO is to provide an incentive for retail investors to acquire risk -- the shares from investors and insiders, and then to continue holding that stock and limit volatility.

But the smart money had already decided what the stock was valued at because of trading activity in secondary markets, which was in a range of $38 to $42. The price was set by the secondary markets about a month before the IPO.

The opening price was set at $38 so that a 10% pop would leave as little "money on the table" as possible but that's not much incentive to take on a very risky investment.

The fact that retail investors disagreed with the valuation and largely stayed away is a very good sign because it shows that they made smarter decisions than the Wall Street bankers and their clients.

So let's not shed tears for the "smart money" they were the ones that literally bought the hype about Facebook's future prospects. Plus, the SEC isn't going to help them because they are considered to be sophisticated buyers that know the risks.

The good news is that few small investors bought shares; the bad news is that few small investors bought shares.

This means that the smart money, in its zeal to leave as little money on the table in the IPO (it's called fair pricing), has messed things up for future tech IPOs and prospects for getting their money out of their other positions. Greed has its consequences.

The Facebook fiasco also puts the spotlight on secondary markets and the role they play in helping private companies raise capital and for early investors to find an exit.

It should be good news for private stock markets such as Sharespost and Second Market because tech IPOs will be cutback leaving these markets in a great position as the only alternative to being acquired.

The problem for the smart money is that these private markets have little liquidity and share prices are far more susceptible to hype and manipulation than in public markets. It could quickly become be a dumb investment.

Topic: Start-Ups

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7 comments
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  • I wouldn't laugh too hard

    Much of Wall Street's "smart money" is money managed for small investors and retirement plans.

    I never got facebook. If there's USD38 billion worth there I don't see it.
    Richard Flude
    • Agree whole heartedly....

      Never saw it myself.

      Pagan jim
      James Quinn
  • Actually, the smart money watched from the sidelines

    Ergo, Warren Buffet.
    Rabid Howler Monkey
  • leader technolgies

    FACEBOOK the idea that people simply weigh the benefits (say, money) against the costs (the possibility of getting caught and punished) and act accordingly, is delinquent and disgracefu??l

    WHAT ZUCKERBERG STOLE
    Fenwick & West (Leader???s former attorney) knew about this patent and knew of the idea facebook you where Leader???s attorney working at leader technolgies at the time and you know how zuck stole the idea facebook. was that disclosed in the S-1? It wasn???t
    Everybody cheated and scammed and deceived everybody at harvard

    Who was able to sell Facebook stock at $45 per share

    mmckibben@leader.com email

    IF YOU HAVE EMAILS ON MARK ZUCKERBERG SEND THEN TO M MCKIBBEN zuck stole from leader technolgies
    newbedave
    • You just won a price .....

      ... for the most incoherent post of the month .... and are now the front runner for the most incoherent post of the century.

      I'm not a Facebook fan .... but what the hell were you trying to say???

      Here is a suggestion: Never post anywhere while under the influence of drugs or alcohol.
      wackoae
  • Or Maybe .......

    The retail investor saw through the hype and knew that at 1/10 the share price FB was still way overvalued and wasn't worth it. Facebook is nothing more than an advertising medium. And like TV, radio, and everything else, is has fully saturated the viewer with trash that they don't care or want to see.

    Standby for Facebook to offer paid, premium memberships that bypass the advertising. When that happens, back up a little as the whole thing implodes. People won't pay for memberships, nor will they tolerate using a site where each page is saturated with worthless advertisments.
    7mgte
  • Smart people got burnt

    I mean, FOX reported how many people became millionaires (of what ultimately amounts to just 8 people, who saw the value rise and then cashed in at just the right moment... of course, don't expect them to be fair and balanced if they ever report on the amount of corporate welfare that company takes...

    Or, yeah, people like the 30-something that invested $4000 in playing this game in good faith and lost it - to those instant millionaires. Now that's how you "work hard" because this IPO is a clear example of what sorts of work "pays off".

    I'm sure they'll say "thanks" at some point. As if the corporate welfare the company already gets isn't more than enough, and they get it because they know that - in a true free market - they wouldn't last 2 minutes... nobody would.


    Sources:

    http://www.southernstudies.org/2012/02/facebooks-dubious-social-mission.html

    http://www.foxbusiness.com/technology/2012/05/18/facebook-overnight-millionaires-start-luxurious-spending-spree/
    (it'll get you chuckling)

    http://www.businessweek.com/news/2012-05-24/facebook-investor-spending-month-s-salary-exposes-hype
    (Funny how FOX ignores that part of this reality, but who said the working class is their primary constituent? We don't create wealth... we're just "costs". Oh, wait, every job creates wealth - Abraham Lincoln alluded to that... amazing how the mindset of what value is and how it is generated can shift over time as well...)




    (note the wording of the subject line... if they are smart, of course, they won't continue to play the same game now that they've been snookered...)
    HypnoToad72