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.
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