Facebook IPO fever, an analysis

Feb 14, 2012

Should you buy Facebook stock when it goes public in the next few months?

Like any individual stock, it's a gamble. Most investors are better off with the relative safety of a stock index fund.

But sometimes it's hard to resist the dream of striking it rich like early investors did with the Microsoft or Amazon IPOs.

On this week's Money Matters, financial commentator Greg Heberlein and KPLU's Dave Meyer look at what to expect when Facebook finally goes on the market.

How can you get in on the deal? 

As Steve Martin might say, first, open a million-dollar account at one of the six investment houses in charge of the sale.

Shares are allocated to the six primary underwriters (Morgan Stanley, JPMorgan Chase, Goldman Sachs, Merrill unit of Bank of America, Barclays and Allen & Co.) , as well as to other brokerages who later on will be added and get smaller allocations.

In a hot deal, no matter how many shares you request, a much lower number is likely to be available. Almost every single share will go to big institutions such as mutual funds and insurance companies, and those with multi-million-dollar accounts who trade actively.

That leaves most people out of the IPO; the rest of us will have to settle for buying the stock from its first purchasers as they try to make a quick profit on opening day.

What will the IPO price be?

Companies initially tell the public a price range at which they hope to sell the shares, and the number of shares that will be available. Those numbers almost always undershoot the actual numbers determined the day of or the day before the sale. In Facebook’s case, the sale will not occur for roughly two or three months. 

So it'll be a while before the price is set. In the meantime, the government must approve the deal while the underwriters try to gauge demand for the shares.

Most final pricing is set a few dollars short of where underwriters expect the first-day trading to occur. That makes sure early investors can flip their shares at a profit and to make other investors feel good.           

In a hot deal such as Facebook’s, first-day trading could be enormous and mostly straight up. But it would not be a shock if it retraced some of its gains in coming months.

What can sabotage the deal?

If the market is tanking, almost certainly the deal will be delayed or curtailed. If company news between the first announcement and the sale turns negative – a bad quarterly profit report, for example – the deal may be suspended or scrapped.

Could Facebook be another Microsoft?

No one knows the answer to that question. 

Facebook is big now, but remember MySpace? Remember how successful Yahoo used to be? The Internet is a fickle medium. Today's big deal could be tomorrow's has-been.