UPDATED: Facebook’s Flawed IPO Strategy

UPDATE: Facebookis down 13% as of 10AM today, May 21, in heavy trading. Last Thursday, Facebook executed the world largest IPO in history based on value. Valued at over $100B, the investment bankers like clip_image001Morgan Stanleyand Facebook should be congratulated and giving each other high-fives, right? It really depends on how you look at it. Many people are getting rich, but given most of the people who matter going forward view it as a total failure, this could be one of the biggest tech IPO strategy blunders ever. Facebook’s IPO strategy was inherently flawed as it didn’t incorporate the long-term impact of a fizzle with important, future constituents on opening day. Facebook raised $16B yesterday based on selling approximately 420M shares. This gives the eight year old company a valuation of $104B. The perceptual problem, though, was that it closed 23 cents or .61% above its opening price of $38. Google, in comparison, rose 20% on its first day of trading back in 2004 and was considered the day after the IPO as one of the hottest stocks going. So how are the press and blogs reacting to the Facebook IPO? Just do a Google News search on “Facebook IPO disappoint” and see what I am talking about. Of course, this isn’t a formal quantitative messaging assessment, but it is a decent proxy on just how much negative press this generated. The issue with all the negative sentiment will translate to a few things. Consumer brokerage houses know that their potential clients have read all this bad news, so I cannot see them pushing Facebook until that sentiment lifts. How about the day traders and the casual do-it-yourself traders? They will likely stay on the sidelines for a while, maybe jumping back in when they can short-sell the stock. How about the institutional guys who have the 401Ks? Do they really want to add that to their portfolio knowing their consumers are watching the stock and reading the same negative sentiment? Of course they won’t. How about Facebook users? I am sure many are aware of the perceptual failure and I just cannot imagine any possible scenario where this is positive. Time will tell, but I believe the negativity surrounding the IPO will degrade user’s perception of the Facebook service. What Facebook and their investment bankers failed to respect was the importance of a first day increase to carry the excitement out a few years. Either that or they over-valued the stock. Any way you look at it, Facebook stock is now handicapped until there’s some kind of resolution and visibility into their future. Hindsight is always 20-20, but it seems that if the perceived value was around $38, Facebook and their investment bankers should have priced the stock at around $32 to allow for the $6 increase and then let everyone write about how amazing Facebook and the IPO was. The bankers seemed to have the right idea when the offering was priced between $28 -$35 a share. I believe had the stock been priced at $28 on IPO day, it could have closed in the $50s due to the positive energy and buzz. I am not an IPO expert, but I am in strategy and marketing, and isn’t this about marketing and selling a company to investors? With the Facebook IPO, I observed a flawed strategy that failed to incorporate the value of the perceptual image of its most important future constituents. Isn’t it ironic that Facebook, viewed as the most successful social media company out there, ignored the impact of the social graph?
Patrick Moorhead

Patrick founded the firm based on his real-world world technology experiences with the understanding of what he wasn’t getting from analysts and consultants. Ten years later, Patrick is ranked #1 among technology industry analysts in terms of “power” (ARInsights)  in “press citations” (Apollo Research). Moorhead is a contributor at Forbes and frequently appears on CNBC. He is a broad-based analyst covering a wide variety of topics including the cloud, enterprise SaaS, collaboration, client computing, and semiconductors. He has 30 years of experience including 15 years of executive experience at high tech companies (NCR, AT&T, Compaq, now HP, and AMD) leading strategy, product management, product marketing, and corporate marketing, including three industry board appointments.