Written by: Jeff Davis, Business Program Chair, Online Division
On Friday, May 18, Facebook offered its shares to the public for the first time. This action is called an initial public offering, or IPO. A company offers its shares to the public in order to generate money. When a member of the public buys a share of stock in Facebook, that person becomes an owner of Facebook. Facebook generated about $16 billion by offering 15% of itself to the public.
It’s likely that you’ve heard the Facebook IPO described as a “flop” by the media. There are a couple reasons you might think that. First, some investors like to buy IPOs immediately, hoping for a quick jump in the price as everyone else tries to get in on the deal. There wasn’t a price jump for Facebook. In fact, the stock first traded for $42 but steadily declined to about $28 over the next few weeks. Second, the lower stock price indicates that people don’t think Facebook is worth as much as the company hoped.
What does this mean for Facebook? Surprisingly, very little. Companies don’t actually sell their shares directly to the public. Instead, the company sells the shares to an investment bank (called the underwriter) for a specified price. The underwriter then owns the shares and bears the risk of selling them to the public. The Facebook IPO had several underwriters, led by investment bank Morgan Stanley, who paid Facebook $38 a share, or $16 billion total. When the market opened on the day of the IPO, the investment banks sold the shares to anyone who wanted to buy them at a price determined by supply and demand.
To be clear, once Facebook sold the shares to the investment banks and received the $16 billion, Facebook is essentially out of the picture. No matter what happens to the stock price from that point forward, Facebook has collected its $16 billion, and that’s that. The buying and selling of Facebook stock now takes place completely between members of the public. Facebook does not earn or lose money when its stock price changes.
On the other hand, people who own a lot of shares of Facebook, like Mark Zuckerberg, do see their wealth fluctuate as the stock price changes. Zuckerberg owns about 500 million shares of Facebook, so a $10 drop in stock price represents $5 billion in lost wealth. Don’t be too worried about him though; he sold 30 million of his own shares in the IPO for $1.1 billion, and his 500 million remaining shares are still currently worth $14 billion, even at the lower-than-expected share price.
Who lost out? Ordinary investors who placed an order to purchase Facebook stock at the market open. A $1,000 investment used to purchase Facebook at the open on May 18 is currently worth less than $700.
Do you have other questions about the Facebook IPO or the IPO process? Ask them in the comments!