- Facebook went public in a hyped IPO in 2012 that yielded a very disappointing return from the first day of trade.
- Facebook put a very high price tag on its shares that together with a NASDAQ technical error made Facebook IPO one of the worst IPO stories ever.
- Alibaba, unlike Facebook, put a reasonable price tag on its shares and chose the NYSE over NASDAQ as the primary market to go public.
In May 2012, after months of anticipation and countless articles, analyses, and speculations, social media giant Facebook made its Wall Street debut on NASDAQ with a disappointing 0.6% increase on the first day of trade. Facebook (FB) stock price continued to drop and reached its all-time low price of $19, reflecting a 50% loss to investors who purchased stocks in the primary market. As shown in chart 1 below, Facebook initially planned to offer 388 million shares in the price range of $28 to $35 ($31.5 mid-point price), raising $12.2 billion before IPO expenses. The mid-point price of $31.5 reflects a 60.58 IPO price earnings ratio, which is close to the average PE of the industry and made Facebook a decent investment, at least, from a P/E standpoint.
On May 15, just two days before its debut, Facebook’s executives decided to push the IPO bar a little higher and increased the IPO share price from $31.5 to $38, adding another $2.5 billion to the amount they expected to raise. The new IPO price increased the IPO price-to-earnings ratio to above 73, higher than the average 61 P/E on the internet information providers industry that reflected a less-appealing investment opportunity based on the PE ratio. On the following day, Facebook once again increased the expected amount to be raised, this time by increasing the number of shares offered to 484 million shares, resulting in $18.4 billion of funds expected to be raised. Facebook probably raised the IPO share price and the number of shares offered after a discussion with the underwriters and after analyzing the demand from the roadshow. However, the changes made to the offering details reduced the possible upside investors could gain from purchasing shares in the IPO and selling them in the secondary market. As shown in chart 2 below, Facebook stock price crossed the IPO price only in July 2013, more than one year after the IPO.
Alibaba (BABA), the giant Chinese e-commerce company is going public this week in the biggest tech IPO in history, raising more than $21 billion. Alibaba’s IPO coverage in the media is similar to Facebook's IPO; however, Alibaba can use the experience Facebook had in order to have a successful IPO. Like Facebook, Alibaba also increased its IPO price a few days before going public in order to maximize the amount raised. However, unlike Facebook, which boosted the IPO price by 20%, Alibaba increased the IPO price by only 6%. After changing the IPO price, Facebook’s IPO price to earnings ratio increased from more than 60 to more than 73, which is a significant increase that lowered the expected possible return from a Facebook investment. Alibaba's 6% rise in IPO price increased the company’s IPO price to earnings ratio from 36 to 39, which is a small impact that kept the IPO PE in a reasonable area, compared to the 37.5 average P/E ratio in the retail industry.
As mentioned above, Facebook’s first day of trade yielded only a disappointing 0.6% upside; however, that was not the only disappointing event that day for Facebook. Facebook was supposed to start trading on NASDAQ at 11 a.m., but it wasn't until 11:30 that traders were able to submit orders that went through the NASDAQ systems. Soon after the glitch was found, NASDAQ turned to another system as an attempt to resolve the technical issue; however, orders made during the switch did not go through, and some orders that went through weren't confirmed until hours later. Facebook's IPO glitch cost NASDAQ not only its good name but also $10 million in an SEC fine and $40 million in investors’ reimbursement funds.
The Facebook IPO fiasco drove Twitter (TWTR) to choose the New York Stock Exchange over NASDAQ. Its another matter that the Twitter IPO was expensive and valuations were high. Alibaba has made the same decision to go with NYSE. Facebook's IPO highlighted the operational risks accompanied with such a hyped IPO, so it’s only reasonable that Alibaba will try to avoid any obstacle that may impact its IPO success.
Facebook and Alibaba are two of the most hyped and covered initial public offerings in recent years. In Facebook’s case, the company increased the IPO price to a level where it did not reflect an appealing investment opportunity to investors, and as a result, its stock price increased only 0.6% in the first day of trading, followed by a 50% decrease in the next twelve months. In addition, Facebook suffered from a technical error in NASDAQ that delayed the stock trade for 30 minutes and caused some investors to either purchase the stock at an irrelevant price or not purchase the stock at all. Alibaba is using Facebook’s experience to avoid the same mistake and have a better, more successful IPO. Alibaba increased the IPO price a minimal 6% in order to gain more money from the IPO without damaging investors’ future gain potential, and it chose to list on the New York Stock Exchange to avoid the technical error that occurred with Facebook’s IPO.