Like other hot technology companies that have gone public before it, Facebook may give the IPO market a much-needed boost.
The giant social network, which was founded in a Harvard dorm room in 2004, said Feb. 1 that it will offer $5 billion worth of shares to the public in the near future.
If successful, Facebook Inc.'s IPO will mark the biggest public offering of a tech company ever — surpassing Google Inc. and Netscape Communications Corp. It also likely will generate market enthusiasm and entice other companies to go public, possibly making 2012 a banner year for IPOs.
“How well Facebook does is extremely important to the rest of the market,” said Rick Summer, a senior equity analyst focused on tech companies at Morningstar Inc.
Of course, it remains to be seen whether Facebook's initial public offering will be as influential as behemoth tech IPOs of the past.
Netscape Communications, which went public in 1995, helped ignite the boom in dot-com IPOs. The euphoria lasted for years — and, of course, ended in a bust.
Google came to market in August 2004 and helped drive interest in the new-issue market that year, when 216 companies went public, the most of any year in the past decade.
And unlike many other hot IPOs that quickly cool, Google has seen its stock price rise sevenfold since it went public, making it one of the more spectacular debuts of a public company.
If the Facebook offering comes to pass, it will do so on the heels of a difficult year for IPOs.
In 2011, 125 companies went public, raising proceeds of $36.3 billion. That's down from 2010, when 154 companies went public and $38.7 billion was raised, according to data from Renaissance Capital LLC, a boutique investment firm that focuses on IPOs.
Of the companies that went public last year, more than half posted negative returns for the year. The FTSE Renaissance U.S. IPO Index, which tracks the returns of U.S. IPOs with more than $100 million in initial market cap, was down 21% for the year, versus a 2.1% return for the S&P 500.
Notable tech IPOs Groupon Inc., Zynga Inc. and Pandora Media Inc. were down for the year, though the first two now trade above their IPO prices. LinkedIn Corp. was the exception. Wildly volatile since making its debut in May, shares in the social networking company have now nearly doubled in price.
The hype over Facebook likely will become more intense as the offering date nears. And investment bankers and asset managers are hoping the excitement will buoy the broader market.
“All the attention could be a boon for the IPO market, and we have already seen signs of renewed strength,” said Kathleen Smith, a principal at Renaissance Capital.
Indeed, 21 companies have filed to go public so far this year and more than 200 others have registered with the SEC. “We are facing a wall of IPO issuers waiting in the wings,” Ms. Smith said. “There are 208 companies in registration, hoping to raise $52 billion in the IPO market, including Facebook.”
WARMER CLIMES
To be sure, the IPO market was heating up well before the Facebook announcement, in large part be-cause lower market volatility is enticing dozens of companies that had shelved their plans to go public in last year's schizoid environment.
The good news for investors is that IPOs are likely to be priced more reasonably. More than half the issues that have been priced this year came in below the original filing price range, according to Ms. Smith. And returns have markedly improved over last year. Renaissance's U.S. IPO Index is up 12.8% year-to-date through Feb. 9 — roughly double the return of the S&P 500.
“It's a better market for investors now than for companies looking to raise money,” said Jim Krapfel, an IPO analyst at Morningstar.
If, as currently rumored, Facebook will be looking for a $100 billion market capitalization, it may be hard to establish momentum in the shares. At that valuation, it would trade at about 27 times its 2011 sales, according to the firm's S-1 filing with the SEC. That's about five times Google's current sales multiple.
“Facebook is clearly a valuable company with great competitive advantages,” Mr. Summer said. “In fact, it may make other IPOs in the tech sector look inadequate.”
But can it maintain the lofty valuation? “The cynic's view is that companies don't go public until they know they're overvalued,” Mr. Summer said.
Tim Keating, chief executive and manager of the Keating Capital Fund, which invests in private companies expected to go public in the near future, is similarly skeptical.
“We see Facebook as quasi-public already and think that the value has largely been realized in the private phase,” he said.
A recent transaction in the private stock market, which is dominated by trading in Facebook shares, recently pegged the firm's value at $94 billion. “We won't be adding Facebook to our portfolio,” Mr. Keating said.
If nothing else, Facebook's IPO may prove the value of having a wirehouse adviser with access to a Wall Street production desk. At least some of the 17,000-plus financial advisers at Morgan Stanley Smith Barney LLC, the lead underwriter for the transaction, will be able to offer their favorite clients a piece of the action.
That piece is likely to be very small, however, as institutional investors and hedge funds will get the lion's share of the offering. For all but the wealthiest (and most lucrative) retail investors at the wirehouses, the decision will be whether to buy into Facebook after it starts trading on a public exchange.
“As a general rule, we stay away from IPOs,” said one wirehouse adviser, who asked to remain anonymous. “A couple of them will be wildly successful, but a lot will be spectacular failures. I think there are better opportunities elsewhere.”
The adviser said he isn't willing to take the chance that Facebook will be one of those successes — despite more than a few clients asking him to buy them shares.
“I explain the IPO allocation process to them and that they won't get the post-IPO pop that you often see with some of them. We get paid to tell clients what they should do, not what they may want to do,” he said.
aosterland@investmentnews.com
