In the middle of all the griping about the “failure” of Facebook’s initial public offering last week, no one seems to be talking about the real reason many investors are upset.
It isn’t that the IPO failed. It didn’t fail: it sold millions of shares and raised a significant base of capital for the company, as well as money for Facebook’s founders and early investors. That qualifies as a successful IPO.
Nor are most investors upset that the valuation was wrong. If they thought it was wrong, they had the option not to buy the shares in the first place, despite having been among those offered first crack.
People aren’t really upset about the role of Morgan Stanley in bringing this IPO to fruition, or about Morgan Stanley’s fees, or even about the technical glitches on the NASDAQ exchange (that caused some very real trading problems).
Here is the real reason: Investors–those big, frontline, so-called “institutional” investors–are upset because they weren’t able to flip Facebook’s stock for an immediate and magnificent profit. They never had any intention of holding the stock, no intention to evaluate its share price and its price-to-earnings ratio and say “I’m going to hold this for 5 years–or 10 years–because it seems like such a solid investment.”
They are not investors so much as opportunists. And they are upset because flipping the stock requires the broader world of mom-and-pop investors to be foolish enough to believe in The Next Big Thing and want to buy its shares at any price. This is what the hoopla is really about. Most of these major investors probably don’t really care about Facebook as a business past that first day of trading. Sure, some will hold shares over time; some will take a percentage of their overall investment and hold it back, to see what the market does. But most are upset because the secondary trading didn’t turn into a bonanza.
That represents the biggest flaw in this whole process, and it is difficult to feel sorry for these major investors who were unable to flip their investments in Facebook as rapidly and lucratively as they wanted.