UMD Business Expert Available to Analyze Facebook IPO

Hoberg’s initial response to the development includes ramifications for Facebook, plus insight to what makes for a solid IPO:

How will going public change Facebook?

Facebook will dramatically change its access to capital markets, and in other ways, its public perception. Publicly traded firms can issue equity to fund new investment, or to fund acquisitions. It can also use its own stock as a way to buy other firms that it may wish to merge with. These issues increase its flexibility, and allow it to be more agile in its market. For example, if Facebook sees the need to merge with another large firm like Yahoo 1-2 years from now in order to stay competitive, a stock swap merger permits the transaction to go through without having to raise a substantial amount of cash, which would be prohibitive for a private firm. On perception, you will have many institutional and retail investors reading its financials, and making investments. This will increase the publicity received by the firm, and perhaps also public confidence in the strength of its business model. In turn, this may help to secure its market share.

What factors would make the Facebook IPO a good investment?

Foremost among factors is the IPO underwriter. History shows that IPOs underwritten by strong names – like Morgan Stanley (as being reported) -- tend to be successful investments. Secondly, consider its competitive position. Facebook appears to be strong and well established. Finally, there is the question of potential growth. Facebook will already be valued quite highly as a whole-firm. How much upside is left? I see many of the pros and cons as well-balanced here, and although the first day return for Facebook will likely be substantial, its long-term outlook may be average for the industry.

Are IPOs, in general, good investment vehicles?

Broadly, evidence from the 1980s and early 1990s shows IPOs as poor investments on average. However, more recently, this no longer appears to be the case. At this point, they perform about as well as their more seasoned industry peers that are already publicly traded. There are two issues to note, however. First, IPOs perform better when the underwriters backing the transaction are more prestigious. Second, they perform better when insiders are selling fewer of their own shares in the IPO (i.e., When most or all of the IPO proceeds are used to fund new investments and not insider sell-outs). A key challenge for investors is the worry that the manager of the IPO firm is choosing to sell when the market places a high value on stock in its given industry. If so, IPOs are less likely to be good investments.