Cohan: Small Fish Burned in Facebook IPO Knew Better

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Sidney
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Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by Sidney » Mon Jun 04, 2012 3:27 pm

http://www.bloomberg.com/news/2012-06-0 ... etter.html

I'm not sure if I agree with his final paragraph
The truth is that if small investors simply remembered they are nowhere to be found on the list of important constituents for an IPO such as Facebook’s, and simply stayed away, the traditional Wall Street IPO machinery would break down. Is that a lesson that can be finally learned, once and for all?
Certainly small investors got taken to the cleaners but even without the small investor, aren't there enough institutional suckers for IPOs to sustain the model?
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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by Random Musings » Mon Jun 04, 2012 3:34 pm

The lesson to be learned (besides not buying IPO's) is to ignore the noise, stick with a plan and investing in low-cost index/passive funds/ETF's.

However, human nature suggests many will do otherwise. Even though most will be a loser when trying to be a winner, it is counterintuitive that trying to be average in the way to be a winner in the investing game.

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by GregLee » Mon Jun 04, 2012 3:40 pm

They should have smelt it and stuck with their pan.

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by tetractys » Mon Jun 04, 2012 3:49 pm

There's a little flame seeking insect in all of us. -- Tet

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by dave66 » Mon Jun 04, 2012 4:16 pm

All the whining is just more of the; 'It's all about ME, and anything in my life that goes wrong is somebody else's fault'... generation. And now the media is catering to them, because they're embarrassed that they got sucked into the hype just like everybody else. Pretty sure Bloomberg was promoting FB beforehand. Now it's all... 'We told you so... Suckers'. Yeah, I don't think so. Then if the stock miraculously goes up again, they'll be saying everybody was an idiot for selling so soon and they knew it would go up. The whole thing is ridiculous.

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by Sidney » Mon Jun 04, 2012 4:25 pm

I haven't seen Cohan promoting anything about Wall Street recently. I was more curious about his last paragraph about small investors.
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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by richard » Mon Jun 04, 2012 4:27 pm

There are at least two issues here:

- sometimes stocks go up, sometimes they go down. To complain that you thought it would go up and it went down is silly

- there are allegations that FB selectively disclosed material negative information about its prospects to institutions, leaving small investors with a misleading impression. To the extent this is true and these small investors relied on what they were told and would not have bought with fuller disclosure, that's much less silly

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by charles_shaw » Mon Jun 04, 2012 4:55 pm

I am young and work in tech/internet. To most familiar with the tech world, Facebook's $100 billion valuation seemed ludicrous. Yet at the same time nearly every financial and media organization just parroted and magnified the hype without asking critical questions why Facebook was worth so much.

As a young investor trying to understand equity markets, I've gotten the impression on several occassions that there is a sort of unspoken caste system in the investing world where small, individual investors are often relegated to the bottom, easily exploited by larger players for their ignorance, or in the case of IPO's it seems they are only invited to the party after the more privileged insiders have already milked the cow dry.

Is this a recent phenomena of the modern financial industry, or has the market always been a place where the first and second rules of investing read: "caveat emptor"? Or am I just jaded, having only witnessed the last five years of economic history, a thin slice of time in the greater scheme of things?

What were IPO's like 20-30 years ago?

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by dave66 » Mon Jun 04, 2012 5:11 pm

I think the .com craze is what really started this stuff. That and the fact that the media and internet, give people much more access to this kind of stuff now. But I hardly think this sort of thing is anything new. Big business has been taking advantage of the little guys for a very long time. There's a whole city called Las Vegas, that was built for that very purpose. People getting taken advantage of, want the government to basically change how nature itself works... Which will never happen. All you can do as an individual is change the way you run your life. The old saying... "If it sounds to good to be true..." Still applies.

But honestly... I think the people claiming Zuckerberg orchestrated all this, are giving him way too much credit. I think he bought into the hype as much as anybody. If people keep telling you you're great, you eventually believe it.

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by livesoft » Mon Jun 04, 2012 5:17 pm

charles_shaw wrote:...

Is this a recent phenomena of the modern financial industry, or has the market always been a place where the first and second rules of investing read: "caveat emptor"? Or am I just jaded, having only witnessed the last five years of economic history, a thin slice of time in the greater scheme of things?

What were IPO's like 20-30 years ago?
Not a recent phenomena. IPOs were just as bad if not worse in years gone buy.

I am aware of one company that had an IPO ... also with the owner's retaining more than 50% share, so essentially total control of the company. When the stock price dropped, the company (i.e. the controlling owner) just used its IPO cash to buy the shares back. Indeed, after getting the money from the IPO, what is to prevent the company from driving its stock price lower and letting the principal owners buy up the lower priced shares? Only then would they go back to normal operations to restore the stock price. Sounds like a big scam to me.

Also think this way: If the company was so great and future profitability was looking good, why would owners sell out in an IPO? Yes, there are reasons,but I think that often an IPO is a way to sell to the greater fool.
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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by hoppy08520 » Mon Jun 04, 2012 5:22 pm

I was thinking of these poor Facebook investors as I read A Random Walk Down Wall Street (2010 edition) last night. Here's what Burton Malkiel wrote on p. 263:
Burton G. Malkiel wrote: Other Stupid Investor Tricks
Be Wary of New Issues.

Do you think you can make lots of money by getting in on the ground floor of the IPO of a company just coming to market?...
My advice is that you should not buy IPOs at their initial offering price and that you should never buy an IPO just after it begins trading at prices that are generally higher than the IPO price. Historically, IPOs have been a bad deal. In measuring all IPOs five years after their initial issuance, researchers have found that IPOs underperform the total stock market by about four percentage points a year.
I don't have any sympathy for any FB Day 1 investors. They weren't investors anyway. They were speculators; they took a gamble and they lost.

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by xerty24 » Mon Jun 04, 2012 5:56 pm

By the same logic, long stock investors should have known better than to be long the market for May, during a crisis, etc. they deserve to lose 10-20% of their investment since they aren't that important.
No excuses, no regrets.

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by hoppy08520 » Mon Jun 04, 2012 6:57 pm

xerty24 wrote:By the same logic, long stock investors should have known better than to be long the market for May, during a crisis, etc. they deserve to lose 10-20% of their investment since they aren't that important.
They've investors, not speculators. I lost money in May like most people, but I'm not blaming anyone or feeling sorry for myself.

At any rate, the stock market has no morality so we shouldnt try to anthropomorphize it.

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Small Fish?

Post by Blackwood » Mon Jun 04, 2012 7:02 pm

I thought only large investors were able to buy Facebook at $38, and the small investors were shut out of the IPO and bought at a price that was (for most of the them) lower than $38.

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Re: Small Fish?

Post by ftobin » Tue Jun 05, 2012 9:13 am

Blackwood wrote:I thought only large investors were able to buy Facebook at $38, and the small investors were shut out of the IPO and bought at a price that was (for most of the them) lower than $38.
FB opened on its IPO day at $42.

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Re: Small Fish?

Post by porcupine » Tue Jun 05, 2012 2:25 pm

Blackwood wrote:I thought only large investors were able to buy Facebook at $38, and the small investors were shut out of the IPO and bought at a price that was (for most of the them) lower than $38.
Large investors got in at a much lower price (before the IPO brouhaha). Anyone care to research what per share price Goldman Sachs paid?

Besides, correct me if I am wrong, but don't even those who come in right at the IPO get in at lower than the IPO price?

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by greg24 » Tue Jun 05, 2012 4:13 pm

dave66 wrote:All the whining is just more of the; 'It's all about ME, and anything in my life that goes wrong is somebody else's fault'... generation.
Boomers?

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by chaz » Tue Jun 05, 2012 8:05 pm

Facebook stock continues to slide down. Where is the bottom?
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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by bombcar » Tue Jun 05, 2012 8:13 pm

chaz wrote:Facebook stock continues to slide down. Where is the bottom?
$0.00

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by trico » Tue Jun 05, 2012 8:33 pm

I did a big study in 2001 on IPO's in general, and found some interesting things. Large institutions that want to buy in, buy in big time and get a special deal from the broker. In this case Morgan Stanley. Usually they buy in at 1/2 the opening IPO price then sell their stake on opening day. Usually doubleing their money. Now how can some small investor do that. The game is rigged big time on hot IPO's like facebook. So its buyer beware.

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by chaz » Tue Jun 05, 2012 8:52 pm

bombcar wrote:
chaz wrote:Facebook stock continues to slide down. Where is the bottom?
$0.00
That will be the time to buy it.
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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by rmark1 » Tue Jun 05, 2012 9:06 pm

IIRC, Ben Graham back in 1949 recommended against buying IPO's. There is a bit of a lottery ticket effect with IPO's, a few big winners with many pretty so so.

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by sometimesinvestor » Tue Jun 05, 2012 9:42 pm

This incident was unfortunate. The general rule on IPOs is that if you can get it you don't want it .Here I believe the company actually made an effoprt to enable small investors to get in at the opening. Obviously this backfired.Even if you believe in individual stocks you can't believe in forecasts. Thus it is probably imprudent to buy an IPO until the first earnings report after the end of the period when insiders are allowed to sell.
Bottom line I guess agree with the subject of this thread,

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by nisiprius » Wed Jun 06, 2012 6:02 am

I don't have sympathy for the small investors who bought it hoping to get rich quick in a speculative one-or-two-day pop. I don't have a great deal of sympathy for small investor who think (correctly IMHO) that IPOs are a good deal for insiders, and (foolishly) that buying it on the open market as quickly as possible is almost the same as getting in on the real deal. I have anger at the system that allows this systematic fleecing of the lambs.

I do have sympathy for the small investors whose orders were bungled by NASDAQ and are being stonewalled on getting their legitimate trades retroactively reinstated. NASDAQ and the brokers are basically s***wing the small investors for being small investors. There was a throwaway on this morning's news that NASDAQ has announced that they are, in fact, going to do something about it, and this Reuters article says so, too, but the details are murky and the amount set aside for the purpose, $13 million, sounds grotesquely inadequate. Sounds like one of these joke-settlements where everyone who had a Facebook order in will received a check for $6.23 three years from now.

Obviously, what would be fair would be for brokerages to retrieve their records for the orders that were placed, and make good on compensating investors by giving them a close approximation to what they would have received if the orders had gone through. What's so hard about that? That doesn't sound like rocket science. Making good doesn't involve paying some random amount, it involves doing your best to give a good approximation to executing the bungled trade. If they could retroactively back out Flash Crash trades that had actually been executed, why can't they retroactively execute Facebook IPO trades that didn't?
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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by RadAudit » Wed Jun 06, 2012 6:53 am

porcupine wrote:Large investors got in at a much lower price (before the IPO brouhaha). Anyone care to research what per share price Goldman Sachs paid?
If I recall correctly (from 35+) years ago, one of the purposes of a stock market was to distribute stock from a firm to the public; and, brokerages are paid for their services of bringing an IPO stock to market by receiving discounted shares which they sell. I would think the brokerages activities in that process are a little more complicated than placing a three line note in the classified ads and waiting for buyers to appear at their door. If the small investor had failed to buy the stock, the broker would have taken a hit to his bottom line and FB wouldn't have all the money it hoped for. Other institutions - active mutual fund, hedge funds [?], etc. - may have purchased a bulk of the shares because of the brokerages efforts. But, I believe that small investors are a key part of the process.

How well GS did its job would account, in part, for the lower share price to GS.

The speculators got burned because, among other things, they didn't process readily available information about GM withdrawing their ad dollars, and FB telling them that most of the user growth was in mobile users and FB hadn't figured out how to monetize that growth. The speculators didn't have to try to buy.

The problems with NASDAQ not being able to process orders in a timely manner was another wonderful wrinkle in an increasingly muddled story.
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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by nisiprius » Wed Jun 06, 2012 7:27 am

RadAudit wrote:The problems with NASDAQ not being able to process orders in a timely manner was another wonderful wrinkle in an increasingly muddled story.
Particularly given NASDAQ's image as the electronified, high-tech, cyberspace, new-millennium marketplace.
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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by Fallible » Wed Jun 06, 2012 8:20 pm

nisiprius wrote:
RadAudit wrote:The problems with NASDAQ not being able to process orders in a timely manner was another wonderful wrinkle in an increasingly muddled story.
Particularly given NASDAQ's image as the electronified, high-tech, cyberspace, new-millennium marketplace.
Would NASDAQ have messed up when Bernie Madoff was at the helm? Just wonderin'.
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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by chaz » Wed Jun 06, 2012 8:53 pm

Fallible wrote:
nisiprius wrote:
RadAudit wrote:The problems with NASDAQ not being able to process orders in a timely manner was another wonderful wrinkle in an increasingly muddled story.
Particularly given NASDAQ's image as the electronified, high-tech, cyberspace, new-millennium marketplace.
Would NASDAQ have messed up when Bernie Madoff was at the helm? Just wonderin'.
mad off is in a better place now.
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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by nisiprius » Wed Jun 06, 2012 9:46 pm

Planet Money had a piece on Facebook last week, which I only just got around to listening to; #373. They quoted a valuation expert named... Siddharam? who said that to justify its valuation, ten years from now Facebook will need to be receiving 10% of all the money spent on advertising. In the entire world. Not just Internet advertising, but all advertising.
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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by Valuethinker » Thu Jun 07, 2012 5:26 am

trico wrote:I did a big study in 2001 on IPO's in general, and found some interesting things. Large institutions that want to buy in, buy in big time and get a special deal from the broker. In this case Morgan Stanley. Usually they buy in at 1/2 the opening IPO price then sell their stake on opening day. Usually doubleing their money. Now how can some small investor do that. The game is rigged big time on hot IPO's like facebook. So its buyer beware.
A little more complex than that.

On the IPO itself, there are no 'cheap deals' (by law) *except* that institutions get the IPO price (and the first day closing premium can be a lot higher-- Jetblue comes to mind). Generally that 'discount' is around 10% in a well managed IPO.

What you are referring to is a 'pre IPO round' which were indeed common in the dot com era. The investment bank (and other connected parties) would put their own money in in the weeks or months leading up to the IPO. Since it is their capital, and their risk, post the dot com meltdown this became a lot less popular. IPOs get pulled, and that can leave banks and 'friends and family' staring at thumping losses.

That is in part what drove the Facebook IPO. A successive round of private investments at higher and higher valuations. That was a significant mistake by the company to allow that false market to emerge.

A far better strategy would have been to issue relatively few shares at say a $50bn valuation, thus ensuring a healthy first day premium and happy new investors *but* also existing investors would have suffered relatively little dilution. Post the expiry of the post IPO lock in (typically 6-18 months) they could have sold more shares at a higher price.

Instead it looks like everybody got greedy. The IPO price and size was raised at the last minute, probably c. $5-7 above the price it should have been done at. VCs and others sold more shares than they had previously agreed to. Conversely institutions and individual investors got more stock than they had anticipated.

On top of this you have the debacle of changing the forecast days before the IPO, then SEC rules blocking publication of that.

So you have a first day closing discount, which is a nightmare situation for everyone in an IPO except the shareholders who sold out entirely.

A monumental eff up on the part of underwriters (who may have a thumping loss on the stock they hold), management, VCs, which has damaged the company with investors and potentially with customers.

Ironic contrast to Google which apparently botched the IPO completely (they tried to minimize the investment banks and so were very underpriced at issue) but an excellent investment pst.

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by Valuethinker » Thu Jun 07, 2012 5:31 am

nisiprius wrote:Planet Money had a piece on Facebook last week, which I only just got around to listening to; #373. They quoted a valuation expert named... Siddharam? who said that to justify its valuation, ten years from now Facebook will need to be receiving 10% of all the money spent on advertising. In the entire world. Not just Internet advertising, but all advertising.
These are just views and we'd have to see his discounted cash flow model.

However the IPO price priced 'execute to perfection'. Ie that Facebook really is another Google. The history of the Internets and the rise and fall of leaders suggests that was a risky bet.

I think the pre IPO private market over the last few years, by driving the value to ridiculous levels, hurt the company quite significantly. I imagine Zuckerberg got overawed by rising values and flattery, and also was badly advised.

that last price rise by the underwriters was something that basically should not have been allowed to occur, ditto the increase in the amount being sold by existing investors.

The good news such as it is is that after a couple of ropey major IPOs (Group On, Facebook) the 'social internet' sector is less likely to succumb to bubble logic: we do not have a generalized repeat of 2000 here.

People have been reminded that capital markets are indeed risky things, and IPO pricing an imperfect art.

A number of ropey business models will just not get funded as a result of this-- again, a good thing.

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Re: Cohan: Small Fish Burned in Facebook IPO Knew Better

Post by Valuethinker » Thu Jun 07, 2012 5:51 am

richard wrote:There are at least two issues here:

- sometimes stocks go up, sometimes they go down. To complain that you thought it would go up and it went down is silly

- there are allegations that FB selectively disclosed material negative information about its prospects to institutions, leaving small investors with a misleading impression. To the extent this is true and these small investors relied on what they were told and would not have bought with fuller disclosure, that's much less silly
I think under US law, latter could be fraud?

(Richard I know you know the below, this is more for general discussion)

They upped the price and size of issue only days before, which smacks of getting greedy (or scared about business prospects).

The IPO discount exists because companies need to raise new capital from investors who are worried about getting legged over. There is a huge information asymmetry in a company going public between private shareholders and new, incoming shareholders. The process of private funding rounds pre IPO and a private market for shares, that existed with Facebook, definitely blurred the issue.

Countries and systems that have tried to fix the IPO system to abolish the discount (eg the Google auction at IPO) have basically not worked. The big issues are all done book build by the lead managers and the syndicate (Ie US style).

However US IPO fees ar c. 7% of money raised, Europe c. 4-5%, Asia c. 3%. No one has convincingly explained why, on US markets, companies (and therefore shareholders) should pay so much more.

Generally investment banking is a risk business. A lot of IPOs get pulled, and lawyers cut their fees (but still get paid something) and ditto accountants. Investment banks get basically nothing for all that time and work. Investment banking is a big overhead operation.

If the IPO goes ahead then it is still risky.

Underwriters, Green Shoe notwithstanding (legalized price manipulation in the first 30 days post IPO), take significant risk that the shares will not be sold at the price they buy them from the IPOing client, on the other hand, they may negotiate excessive discounts from IPO companies for doing that.

Without the current system, companies (as Google found), would likely have to issue new equity at quite large discounts to attract investors.
Secondary offerings (which in the UK are all preemptive, ie shareholders usually get first crack) are typically done at 20-40% discounts to existing stock price. That's for a company with a quoted track record where the due diligence has already been done.

Since the whole operation is 'bespoke' and one IPO is not what another IPO is (the product, ie the company's stock, can be completely different) you get specialized intermediaries (investment banks) who charge big fees on the ones that work.

it is not a market ripe for disintermediation.

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