The Mystery of IPO Pricing

It looks pretty clear that Facebook shares would have fallen below their $38 initial price if not for extraordinary intervention by some mystery player or players, who were presumably involved in the underwriting of the IPO. The relevation of that fact is going to be mildly embarassing to Facebook, though probably not as embarassing as a fall in price would have been. But perhaps these mystery players will vanish on Monday and the price will fall leading to bad press. What’s less clear is why that kind of thing should be seen as bad news for Facebook. For starters, even though a large IPO “pop” sounds good all it really means in brass tacks terms is that the company left money on the table when pricing its shares, and some special lucky customers got themselves a bargain. More broadly, even if you think a management team should be judged solely on its ability to produce value for shareholders, the “value” in question has got to be measured over a longer time frame than a single day or week. Facebook’s valuation is an enormous multiple of its earnings, and that’s as true at $33 as it is at $38. The only halfway reasonable thing to ask the company’s management to do over the next couple of years is make progress on growing earnings at the kind of rate that could justify the range of valuations the company has gotten. Small fluctuations in the share price are totally irrelevant to the underlying business proposition.