Figuring Out The Real Flaws With Facebook’s IPO

           When it comes to Facebook’s Initial Public Offering (IPO), it seems like there are more people to blame than the 900 million active users who use the social networking site. Investors have faulted lead underwriter Morgan Stanley for originally pricing the Facebook’s stock at $38 per share - especially after the firm learned that Facebook first quarter profit numbers in 2012 were lower than its fourth quarter profit numbers in 2011. Morgan Stanley placed blame on Nasdaq, the exchange where Facebook shares are traded, for the technology problems that led to an “unprecedented confusion and disarray” and resulted in a 30-minute delay of the IPO. Venture Capital firm Kleiner Perkins Caufield Byers said that Facebook shares trading on SecondMarket, a stock exchange available for private companies, before the IPO valued the company at $104 billion. This means Facebook’s shares would cost the equivalent of $48.64 per share given the amount of shares made available during the IPO – 22.2% premium over the $38 per share price during the IPO.

            For all of the negative criticism of Facebook’s IPO, there is one point that has been largely missed by most journalists and commentators. From a financial perspective, the IPO could not have gone much better for Facebook. Firms really have only two sources when it comes to raising new capital for its business – equity and debt. Equity capital means that outside investors are taking ownership stakes in a company (usually in the form of stock) in exchange for providing money. Current equity owners want new investors to provide as much capital as possible for as little of an ownership stake as possible. This causes the smallest amount of dilution of current ownership stakes and makes it easier to raise money in the future. 

Facebook’s IPO meant that new shareholders were going to provide Facebook with cash in exchange for the ownership in the company. Once Facebook sells its shares to new investors after the IPO then it receives the money. The company no longer receives money from any future stock transactions that occur on the Nasdaq unless the company issues new shares after the IPO. If a stock declines in price after its IPO then the company received more money at a higher valuation than its market value – a good thing for the company.

Yet, IPOs are not traditionally considered successful unless the share price increases in the days after a company goes public. The main reason for this is that the investors who buy the IPO – especially large institutional investors like state pension funds or insurance companies – lose money if the stock price declines in value. In addition, most news coverage about publicly traded companies centers on their stock price. When a stock price decreases immediately after an IPO, investors and the media consider the company to have significant problems resulting in significant negative media coverage. Therefore, companies often undervalue their IPOs to get the initial “pop” of their stock even though that means firm receives less money from this transaction.  

Sports organization should take note of what happened to Facebook during its IPO. Facebook obtained an outcome in its financial best interest but has been slammed by the media and critics because of the decline in the stock price after the IPO. More and more sports organizations are using techniques that would increase their performance both on and off the field in ways that break with past practices in the sports industry. In fact, B6A service offerings are designed to help sports organizations enhance their sponsorship, marketing, and analytic capabilities in non-traditional ways.

Solely examining the quantitative results, however, without having the proper qualitative analysis or communication strategy can prove to be a disaster for an organization. In Facebook’s case, the company should have anticipated its shares to decrease after its IPO especially given its quarterly decline in profits. Yet, it appears the company was not prepared for the backlash that occurred even though companies that had similar declines in their IPO prices faced the same type (if not the amount) of scrutiny.  

From a sports perspective, an organization that had a similar predicament to Facebook is Italian Serie B team Triestina. For years, it tried numerous promotions, marketing campaigns, etc. to attract teams to its 32,000 seat stadium but average game attendance remain around 5,000 fans. In addition, the team makes 70% of its revenue from its television contract with Sky Italia. Therefore, Triestina decided to cover its empty seats using vinyl tarps that were painted with fans. This would make the stadium appear full and enhance the television viewing experience (as television viewers like stadiums that appear full). This move makes sense from a financial perspective as the team was making a decision that impacted 70% of its revenue. The team never really explained this decision to its key audiences before placing the tarps on the seats of the stadium. Instead, fans, the media, and sponsors attended the game and were confronted with the tarps during a game and were justifiably angered at seeing fake fans in the stadium. Only after receiving criticism did Triestina try to address its use of the tarps with significant damage done to its brand. 

A few weeks ago, it would seem odd to say that your company does not end up like Facebook. Yet, Facebook’s flawed IPO should provide a good lesson to sports managers. Good analysis will not always be in line with popular perceptions. Identifying and anticipating reaction when this occurs is critical to avoiding a communication and brand crisis.