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Facebook gold rush: fanfare vs realities

india Updated: May 20, 2012 21:01 IST

It’s an old line on Wall Street: If you can get your hands on a hot new stock, you probably don’t want it. This bit of Street wisdom came to mind last week, as Facebook went public amid so much fanfare.

The stock eked out a 23-cent gain on Day 1, to $38.23. This suggests that many professional money managers viewed all the hype as just that. Whatever the long-term prospects of this company, the idea that small-time investors might get rich fast struck the pros as absurd.

It is true that initial public offerings have increasingly become a game for early investors and their Wall Street enablers. Since the 1980s, average first-day gains on new stock issues have risen steadily. According to one 2006 study, the average first-day return on IPO’s in the 1980s was 7%. By the mid-1990s, it was 15%. In the 1999-2000 dot-com boom, it was 65%.

Why did Facebook get a relatively slow start out of the trading gate? One possibility is that the investment bankers who priced the stock considered the history of private trading in the shares before the offering. Facebook was unusual in this way, Laszlo Birinyi of Birinyi Associates said last week.

“There was trading before the IPO, so many investors have some idea of pricing,” he noted. Most offerings are priced based upon what the company and bankers guess the stock will fetch.

Indications are that Facebook was bought primarily by individual investors, not institutions. To many market veterans, this showed that the smart money was getting out while the getting was good. NYT