There are thousands of articles dissecting the reasons why things went bad for Facebook yet none have mentioned the role of secondary markets. In these private stock exchanges, Facebook was trading at around US$42 a share in the weeks before the IPO.
Interestingly, Facebook set the opening price at US$38 hoping for about a 10% pop on the first day, which would bring it up to US$42 at close.
Since secondary markets are the playground of accredited investors, it’s “smart money,” and much of it institutional, it would be a fair assumption by Facebook that a $38 price was in the right ballpark.
However, this means that the trading in secondary markets essentially set the IPO price, leaving little wiggle room for Facebook.
Will secondary markets become more important in pricing future IPOs? Or will private companies choose to limit secondary market trading as much as they can, to avoid what happened with Facebook?
It’s ironic that Google carefully managed its IPO and snubbed much of Wall Street so as to not reward clients of investment banks; and to price fairly at the outset so that there would be as little pop as possible, yet it closed 18% up. Facebook went with the investment banks and took their advice and ended up with flop.