Liam Dann: Facebook IPO timely lesson to Key and co

Opinion

Facebook shares finally bounced yesterday after a 10-day freefall which has done more damage to the company's reputation in the investment world than Mark Zuckerberg's hoodie ever could.

Despite raising some US$16 billion ($21 billion) for the founder and early investors, the float has been a disaster and a textbook example of how not to run an initial public offer.

The whole debacle offers some timely lessons for those involved with the float of Mighty River Power later this year.

Even after Facebook stock rebounded 5 per cent in US trading yesterday morning, it was still about 23 per cent off its listing price.

That represents the destruction of nearly a quarter of the US$104 billion value it was ascribed after the initial public offer closed on May 18.

Clearly it was over-priced.

Nothing material has happened in the past fortnight to warrant such a dramatic reappraisal of the company's business model.

A successful float requires the organising brokers to accurately assess demand and then weight the final supply appropriately.

Usually that means leaving enough demand in the market to ensure a slight rise on the day of float.

If nothing else, that is important for the positive publicity and good will it brings - it sets the tone for analysts and market commentators for months to come.

Too big a rise is problematic as it suggests that too much value has been left on the table and the broker hasn't raised as much for their client as they should have.

But a big fall from the offer price indicates that the stock has been oversold on hype.

Ideally, after a small rise on the day of the float, a well weighted stock should see its price remain steady with no major movements until the market gets fresh company news to warrant some change in valuation.

For some reason, in the middle of the hype last month, the Facebook founders and their brokers got greedy.

Initially Facebook was seeking to raise about US$10.6 billion - selling more than 337 million shares for somewhere between US$28 and US$35 apiece,

Just days before going live, a decision was made to boost the number of shares available by 25 per cent, to 421 million.

On the eve of the float the price was set at $38 a share, valuing the company at US$104 billion.

Why? In the case of wealthy-beyond-his-years founder Mark Zuckerberg it can't have been the dollars. Perhaps it was hubris - egged on by the brokers for whom it probably was about the money.

If Zuckerberg and the Facebook board had resisted that urge to pump up the float it wouldn't have been pitched too badly. Initial falls took it back to the level of their original target value. After that, sentiment turned on them.

Morgan Stanley, the lead broker for the Facebook float, has refused to accept any blame for the failure.

Talking to CNBC last week, chief executive James Gorman pointed to naive investors who panicked in the days after the float. He urged them to take a long-term view.

That's a bit rich because the sophistication of the investors taking part in the offer has everything to do with how the stock is marketed by the lead broker.

That's why the brokers involved with Mighty River will need to be extra cautious.

They are going to have to take it as a given that there will be naive investors involved and act appropriately.

An initial public offer worth about $1.5 billion would make it one of the largest in New Zealand history.

And because it is a state asset, we are likely to see all taxpayers offered the chance to participate with the chance to take up relatively small parcels of shares.

For many New Zealanders this public offer may represent the first direct exposure to the share market - outside of KiwiSaver at least.

There will need to be a lot of investor education - as much as the Government wants a good price, it can't allow a Facebook-style hype to emerge.

Brokers First New Zealand Capital, Macquarie Capital New Zealand, and Goldman Sachs are set to split upwards of $150 million in fees for getting Mighty River on to the stock exchange.

They will be facing a far greater degree of public scrutiny with this float than they have with anything else for many years.

They'll need to get it right and that doesn't necessarily just mean nailing the highest possible return for the Government on the day of the float.

With at least three more big energy company IPOs in the pipeline, a float that leaves a bad taste in investors' mouths could be more costly in the long-run.

On the flipside, they won't be doing the taxpayer any favours if they undersell these valuable assets.

It will need to be a finely balanced offer and the window for getting it right is relatively small.

For the Government, the whole thing is fraught with political risk. As it is they face a great deal of public opposition to floating assets at all.

A bungled float would jeopardise plans for future asset sales and that has a flow on to the budget projections they have made for the next few years.

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