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Catching a Falling Financial Knife

Facebook IPO Facts - The Good, The Bad and The Ugly

Companies / Corporate News May 17, 2012 - 07:42 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleShah Gilani writes: Face it, you want it. It seems that everyone wants a piece of the Facebook IPO.

But, can you handle the truth? Will the hyped sensationalism be a boon or a boondoggle?

I'm not going to tell you what to do, whether you should buy Facebook sooner rather than later. That's up to you.


However, I will tell you that I won't be buying it right away, but, I will be buying it if...

First though, here's the good the bad and the ugly truth about the company, the IPO and owning "FB."

The Good News About the Facebook IPO

The good news is overwhelming if you're Mark Zuckerberg, any of the company's founders, executives, or venture capital backers, many of whom own Facebook stock (Nasdaq: FB) at a dollar a share.

So far, the target range the stock is expected to be priced at--which was originally $28-$35/share-- has been raised to between $34-$38.

And it could very well go higher before tonight's pricing deadline. The amount of shares to be floated is being raised too.

That's all good news for the insiders, the underwriters and the company itself.

FB is causing its own IPO hype, partly because it will be the largest IPO in U.S. history, in terms of the value it will put on the company, which will likely approach $100 billion. However, Visa in 2008 and GM in 2010 will have raised more money on their IPO debuts. (I know, calling GM's IPO a debut is strange to me too.)

Facebook will raise at least $13 billion (at the lowest end of the price and share offering range) and bank some $9 billion in cash on its balance sheet. That's good news.

But better than that, the company will now have a huge hoard of stock as currency to use to buy up companies and technology to advance its master of the social media universe status.

The other good news is that... The other good news is that the stock will become a must-have on many growth managers' buy lists. Frenzied buying by institutional money managers could push the stock higher on its opening day and shortly after.

In addition to initial institutional interest, in short order, FB-- because of its size-- will likely be added to the NASDAQ Composite and eventually the S&P 500 index.

While the NASDAQ OMX Group wants to include FB as soon as possible, it will have to wait the three months it has set aside for that to happen. As far as being included in the S&P 500, that will take at least six months and will probably require FB's "float" (the number of shares available to trade to the public) to exceed 50% of all shares outstanding.

The IPO will only release about 15% of FB's total shares, but more shares will be freed up after the 4-6 month "lock-up" period that restricts certain insiders from selling right away.

Whenever a company is added to a major index, its stock price usually rises because money mangers and index funds have to buy it to keep their portfolios in balance with their benchmarks.

But, be forewarned, the stock won't jump on the day it is added to either index. It will jump on the day of the announcement that it will be added.

The rest of the good news about the IPO and owning FB remains to be seen.

With its new war chest of stock currency, questions will abound about what Zuckerberg, who will control some 61% of the voting stock, will do to grow the company in terms of hires, acquisitions and technology advancements.

To me, the good news about owning FB is that it will be a giant among giants and I believe will change the nature of the Internet, commerce and our lives.

The Bad News About the Facebook IPO

The bad news about FB's IPO is all its hype. And that has me worried for several reasons.

In terms of market metrics, FB will come out saddled with high relative price/earnings multiples and high growth prospects. Both of those can turn around in a flash and disappoint investors in a big way.

As far as earnings, the first quarter of 2012 saw lower earnings than the first quarter of 2011. That's not a good start for the company's debut. Based on the expected price range and the company's valuation, the price earnings multiple looks to be around 100.

Of the 33 companies that have a market cap of more than $77 billion (the low end of the offering), only two, Amazon.com and Bank of America have multiples of 100 or higher. Amazon is its own story and Bank of America is so high because its earnings are so low.

Makes you wonder, doesn't it?

Then there's all the hype that accompanied LinkedIn (NYSE: LNKD) and Groupon's IPOs. LinkedIn had a PE of 200 when it came out, rose 31% its first day then fell by one third promptly. Groupon (Nasdaq: GRPN) has had to restate its financials and after a hyped IPO is trading two thirds of its IPO price.

Makes you wonder, doesn't it?

Then There Was the Ugly

So much for the Bad. The Ugly is worse.

It's May. The markets are in a state of decline. Any macro implosion in Europe (it's already happening) or China (its already happening) could take U.S. stocks lower and Facebook along with them.

If FB comes out of the cannon and shoots for the stars, it may well overshoot any safety net that sensible investors might expect is a floor where the stock could become a buy.

The really ugly scenario is that the IPO causes a massive influx of public investors to bid up the stock and have to then dump it hand over fist if a quick drop triggers margin calls or an out right panic exodus.

My money is patient. I'll be watching the show from the sidelines.

What's important to me is how the stock looks and "feels" in the days and weeks after the IPO. Face it, Facebook isn't going to trade at 200 times earnings any time soon, so don't expect it to double.

And about those earnings. Any time a company warns about its earnings BEFORE they go public, as Facebook just did, I'm going to be prudent and not someone's put option.

What will I likely do? I'll look to buy on any big dips, especially the ones that may come after the lock-up period expires and all those billionaires and multimillionaire insiders want to sell and bid up the price of mega yachts and Sand Hill real estate.

Face it; Facebook is going to be long story. I'm not in a rush to hit it at the top--especially when the top looks like where the stock is coming out.

Source :http://moneymorning.com/2012/05/17/the-facebook-ipo-facts-the-good-the-bad-and-the-ugly/

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Catching a Falling Financial Knife