Mark Cuban is Dead Right About Facebook’s IPO – it was a Success

Mark Cuban says the Facebook IPO was handled exactly as it should have been by the company.  And without getting into the really mundane specifics (like whether they knowingly misled investors about growth, but that’s a totally different story) I think Cuban is exactly right.  First, some basics.  The primary purpose of an initial public offering is really rather simple – to raise capital that helps the company sow the seed for future expansion.  That’s it.  So the goal of an IPO is to maximize capital raised.  The goal is not to manage the stock to make sure investors get a good return on the days, weeks or months directly after the IPO.  The goal is to raise capital that allows the company to leverage its operation and create the foundation for long-term growth (which, theoretically, should create substantial share price appreciation).  Cuban summarizes his take:

“Facebook was able to raise about 10 BILLION DOLLARS in this IPO. The CFO’s job is not to manage shareholder portfolios. His job is to help Facebook succeed. I don’t know about you, but putting 10 BILLION DOLLARS in the bank in my opinion is one way to help them succeed.

Whose job is it to help manage the portfolio’s of FB investors ? If an investor doesn’t manage their own portfolio, the brokers who sold them the stock are responsible.  It’s their job to read the prospectus if you as an investor are too lazy to do so.  It is the job of the broker to help the investor understand the value of the company and make a buying decision. No question that there are a lot of brokers out there that did not do their jobs.

As far as traders who bought the stock hoping for a pop. No one cares about them. Seriously. You trade, you know you are going to lose on trades. That is how things work.”

Dead right.  If you bought into the Facebook IPO and you lost money, then you lost.  That’s how the stock market works.  When you sit down at the Wall Street poker table you’re sitting down with grown ass men and women who are prepared to take your wallet right out of your hands if you’re not as prepared as they are.   No, scratch that.  They’ll take your wallet and come back for the shirt on your back if you let them.  That’s the market.  It’s brutally real and if you’re not prepared or tough enough to accept the enormous responsibility that comes with it then you’re in the wrong arena.  As Cuban says:

“When you sit at the trading terminal you look for the sucker. When you don’t see one, it’s you. “

It’s not Facebook’s fault that the shareholders in our “what have you done for me lately world” have lost 50% in 4 months.  It’s the buyer’s fault.  And yes, I know that some people think IPO’s are purely for insider exit strategies.  I don’t think this is entirely true, but even if it is true then you knew what you were getting involved in before Peter Thiel and the other insiders decided to unload their shares in your lap.  There’s no crying on Wall Street.  And no one’s crying for the Facebook shareholders who lost money.

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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • JP

    Cuban lost some serious money in the first month of the IPO. For him to come out now and say these things is almost comical. Despite all that I still have a lot of respect for him and everything he has to say. Its good to hear his vision is 20/20 looking in the rear view mirror.

  • LVG

    People just want a scapegoat. If you lose money or something goes wrong it must be someone else’s fault. And when in doubt just blame a bank. You can’t go wrong there.

  • Nils

    Why is it comical? He lost money and he owns up to his shit.

  • Pod

    Cuban is largely right, but he is wrong that “maximixing capital raised” is the ONLY metric.

    An IPO is not priced at the whim of the investment bankers, despite delusional protestations to the contrary. An IPO is priced based on demand indications from institutional investors at varying price levels, through a process known as “building the book”. The price, in theory, is set to clear the desired volume at the highest price, consistent with Cuban’s assertion of maximum capital raised. However, in practice, the bankers try to leave ~10% upside to an analyticaly derived 12-month “full value” versus the offer price so as to create a “successful” deal, i.e. one where investors earn a positive return. This is important for the interests of the issuer (the company going public) because they want an investor’s first experience with the shares to be ‘positive’ and they want to avoid the bad publicity and stigma of a ‘broken deal’, which can have lasting negative consequences for the issuer.

    In the case of Facebook, Morgan Stanley got it wrong. FB probably should have gone with Goldman Sachs as lead book-runner as Goldman is usually more conservative on IPO pricing. That said, I think Goldman would have got this one wrong as well, as their price would likely have been in the range of $30 versus Morgan Stanley’s $38.

  • DJ

    People have become sissies these days with entitlements galore.

  • Mike Bell

    ” And without getting into the really mundane specifics (like whether they knowingly misled investors about growth, but that’s a totally different story)”

    Seems to me that is far from mundane and an important part of what took place. I partially agree with Cuban. People need to accept responsibility for their decisions. But if Facebook intentionally misrepresented their financial position to investors or brokers, then they committed fraud.

    I have no FB position, haven’t lost (or made) a penny on it, and would not go long this stock until it’s valuation makes sense and it’s future is clearer.

    His musings on the stock market are overly simplistic. The poker game analogy doesn’t hold. Slot machines would be more accurate, i.e. the game is rigged and Wall St. walks away with a big piece no matter what. Not even close to a “fair game” between players of different skill level. That misrepresents the true nature of the game. Again, that is a fraud being pushed by Wall St on Main St. Brokers are not representing clients. That is a charade. They are representing themselves and their firms. Stocks are pushed – like drugs to addicts.

  • John Wilkins

    While you (and Cuban) are correct, I think you are underestimating the moral effect on Facebook management and employees. A very large part of key employee compensation comes from stock options. When I was working a large part of my compensation was stock options. So, I am sure they are unhappy and that certainly is not a positive.

  • Tradeking13

    What if you are a Facebook employee (I’m not) who was granted stock based on an over-inflated stock price? Those people have a legitimate gripe.

  • Erik V

    Thank you Cullen! Finally someone who knows what IPOs are really for. It’s amazing the number of people out there who get this completely backwards.

  • Aspen1880

    bingo! thank’s cullen. cullen and cuban are spot-on. zuk is one smart dude. he dupe’d the sell-side market. he fought the law and the law lost. zuk was also up-front about his fleecing of the market – he’s well quoted as “not running FB for the shareholders”.

  • FXTrader

    Sorkin responded to the original Cuban piece saying:

    “That might make sense if a company is selling itself for cash to a buyer in a merger or acquisition — which is a one-time event — but it misses the long-term nature of the relationship a public company is supposed to have with its investors. If every company sought to use the I.P.O. process simply to fleece investors, selling at the absolute highest price without any sense of room for investors to make a return, no investor would buy shares again. (In some regard, that’s what’s happening to Facebook now.)”

    No one was forced to buy Facebook at the IPO price. Sorkin seems to think that it’s Facebook’s responsibility to sell the company at a reasonable price so that investors on the secondary market can make a quick buck. No, the purpose of an INITIAL public offering is to sell shares on the primary market and maximize capital. If you’re worried about getting fleeced then you shouldn’t buy into it. Simple.

  • http://www.pragcap.com Cullen Roche

    YES. Sorkin seems to think Facebook has some responsibility to cater to the short-term obsession of Wall Street’s trading community. He totally confuses the purpose of a secondary market and a primary market. You don’t sell shares to the public so you can put money in the pockets of HFT traders.

  • Tom Hickey

    Cuban is clearly right. The purpose of an IPO is to get the best price. It was apparently a success.

    And you don’t lose money until you realize the loss. Many people may be down, but they are not out yet. They have not yet lost anything other than on paper.

    The fundamentals have not changed perceptibly, and if they were intentionally misrepresented there is civil and criminal recourse for that. No indication of that. So real value has not changed, only exchange value. Markets are fickle, and the notion that price is always equatable with actual value belies the value-investing in equities that made people like Warren Buffett rich.

    At some point, FB becomes an buying opportunity. Think of the several opportunities to buy AAPL when it looked like the company was going under. FB doesn’t look anything like that.

  • Tom Brown

    Cullen,

    You wrote “There’s no crying on Wall Street.” Well then, how do you explain the actions of Hank Paulson, Ben Bernanke, and Tim Geithner when the banks and GE came to them in 2008 and 2009 with their sob story about needing the government to bail out AIG, pass TARP, and to make them trillions of dollars in emergency loans? I suppose that perhaps those weren’t tears that did that… perhaps those were the results of huge campaign contributions.

  • http://www.pragcap.com Cullen Roche

    The banks didn’t come to Washington crying. What they did was hold the govt hostage and essentially say – “let us fail and the whole thing comes tumbling down on your head. Your call”. This is pretty different than buying an IPO and losing money….

  • Johnny Evers

    Men like Geitner, Paulson, Bernanke are bankers first and public servants second.
    So the banks didn’t need to ask, they didn’t need to hold anybody hostage. They already had their men in the government running things.

  • Andrew P

    I might consider buying FaceBerg if it drops below $4. The price is still way too rich.