A bit more than a week after Facebook’s IPO, two different theories are emerging about the monster offering. The big story is that it was a colossal failure, so bad that it’s hard to think of enough ways properly describe it—a disaster, debacle, catastrophe, maybe even a terrorist attack.
The pushback story is that Facebook’s IPO was actually the most quietly successful public offering of recent memory. Proponents of this theory point out that the only party that matters in an IPO is the company making the offering. Facebook’s purpose, in selling itself to investors, was to get as much money for its shares as possible. It certainly accomplished that.
Facebook sold its shares for $38 each, but the public market seems to believe the firm is currently worth about 16 percent less than that. Shouldn’t investors applaud a company that can sell its stuff at such a “mark-up”? Rather than letting hedge funds and other insiders get a free payday through a huge “pop,” Facebook’s pop-less IPO lets it keep billions more for its own future. As Joe Nocera notes, if you’re bullish about Facebook’s long-term future, you should be happy about this—Facebook now has more resources with which to fight Google and Apple, after all. But of course for most investors, the IPO wasn’t about the long term. If you bought shares on Day 1, you were almost certainly doing so because you expected a pop—and when you didn’t get your sugary popsicle, you whined.
There were ample irregularities in Facebook’s IPO—selective disclosure of its financial expectations, Nasdaq’s inability to perform the most basic functions expected of an exchange—but if the fizzle helps to kill idea that IPOs are a way to make free money, perhaps it will be for good, in the end.
That’s the silver lining in Facebook’s terrible week. From now on, every tech company that offers itself up to world will need to make an airtight financial case for itself. Before Facebook, even obvious turkeys like Groupon managed “successful” IPOs. Not anymore. Not only are we likely to see fewer irrational IPO pops after Facebook, but—in a twist that has taken even Facebook’s critics by surprise—we might even see investors basing their decisions on a firm’s fundamentals.
This will be a necessary corrective to an industry that was getting a bit too puffed-up. I’ve never really believed we were in a tech bubble, but in the hype-saturated week before Facebook made its Nasdaq debut, we verged quite close to the possibility. If Facebook’s shares popped and remained higher than their IPO price for several months, you could plausibly have argued that investors were behaving irrationally—that they didn’t care about Facebook’s business, just the idea that they would be able to sell the stock to a bigger sucker someday.
But Facebook’s IPO proves that there isn’t an endless supply of bigger suckers. And because bigger suckers are the primary ingredients in bubbles, it now seems likely that the new tech bubble—if there ever was one—is dead, dead, dead.
For one thing, Facebook’s IPO will almost certainly suppress the market for acquisitions. Before the IPO, Mark Zuckerberg could spend a billion dollars on Instagram without consulting anyone. Zuck is still all-powerful at Facebook, structurally protected against rebellious shareholders, but if Facebook fails to provide sound explanations for such decisions in the future, its stock price will fall further. To the extent that Facebook uses stock as currency in acquisitions, its offers will necessarily become less attractive to innovative start-ups. Just look at what happened with Instagram: According to the Wall Street Journal, Kevin Systrom initially wanted $2 billion for his firm. Zuckerberg convinced him to take 1 percent of Facebook’s stock on the theory that, if Facebook’s market cap one-day matched Google’s $200 billion valuation, 1 percent would be worth $2 billion.
But imagine if Zuck were making that offer today, when Facebook’s market cap is $68 billion—so 1 percent of Facebook is just $680 million, rather than a magic billion. Would Systrom take the same 1 percent offer now? Maybe, but if he expects to pull off such deals in the future, Zuck’s skills at persuasion will be tested like never before.
Of course, $680 million is still a lot for Instagram. And even at $31, Facebook is still trading at a far higher price-to-earnings ratio than its closest tech rivals. But the big story in the Facebook stock fizzle is that a certain necessary sense of skepticism seems to have entered the market—and, like it or not, that skepticism is sure to spread to all corners of the start-up world. In the end, this will be for the best for everyone involved, Facebook and start-ups included. Nobody wants a tech bubble. Facebook didn’t pop—but if it burst the bubble, we ought to thank it.