|Facebook: Amateur Hour|
A Third Year
Instead we have elected to be around for the long haul. A number of changes have already occurred at Goldman Small Cap Research behind the scenes and we have nearly completed much of our website redesign, which coincides with the launching of new free and premium products this week. Our goal is to become the leading source of free and premium Wall-Street quality research to the retail investor masses, with an emphasis on small cap stocks and penny stocks.
Today, many of you know us for what we call our Opportunity Research. Through this vehicle we publish reports and updates on micro caps and penny stocks on a sponsored basis. Through our idea-generated Select Research offering, we produce this weekly publication which provides an overview of the market and insights and profiles of stocks in the small cap and penny stock worlds.
Was it an IPO or Amateur Hour?
As an analyst on Wall Street (pre-ridiculous rule changes) I was the lead analyst on a number of deals for IPOS and secondary offerings. The way IPOS work is a complicated yet cookie-cutter process. Before a filing is even made, analysts perform due diligence and work out a framework of a pro forma projected income statement, which is then fine-tuned prior to the marketing via roadshows, begins.
The key during the roadshow and marketing is that the firms take Indications of Interest (IOIs) from prospective investors to gauge interest. A rule of thumb we used to determine where a stock would be priced with respect to the stated range and the number of shares offered was the number 7. We knew we could raise the price range and the shares offered if we achieved that number. It would still mean a nice pop in the stock. Most deals are 3-5x oversubscribed. Moreover it was always imperative to line up buyers to buy from the usual IPO flippers. This was always a hard number to gauge but an extremely important part of the process.
So, if you could get a reasonable number of oversubscriptions relative to the number of shares offered, lined up buyers, and had strong analyst support, you had a good deal for the Company and investors.
In Facebook’s (NASDAQ – FB) case, there was only one winner: Facebook. They started off with the wrong structure whereby the key holders owned a higher class of stock, thus limiting voting and real ownership power by outside investors, a la Google (NASDAQ – GOOG). Investors didn’t like it, but they dealt with it. Facebook wielded its power from start to finish. The underwriters then, in our view, clearly acquiesced to management when it not only raised the stated range, but increased the shares offered by 25%. These moves made it hard to provide investors with the pop they wanted. Facebook was looking to maximize its dollars and was successful.
People are up in arms now because during the roadshow the analysts reduced forecasts, and reported it to only a select group of institutions. To reduce numbers during a roadshow never happens. These change a million times at the 11th hour BEFORE, but not during the roadshow. To increase the size and pricing of the deal despite are bad moves and shows how much power Facebook wielded. To keep this information secret is worse as the underwriters get the blame, not Facebook management.
The NASDAQ trading screw-ups last week? All for the best for investors, clearly. However, all the way around, this ended up being a story of greed, control, a high and mighty attitude, acquiescence, and in the end, amateur hour.
Until next week…
Analyst: Robert Goldman
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