Google went public on August 18, 2004, at a price ($85) that was literally underpriced from its auction clearing price. (We know this because "winning" bids were allotted 75% of what they asked for at a particular price. The clearing price would have been the price at which 100% of the bids at that price were filled.) What happened then? There was a pop, an 18% pop that is almost exactly average for first-day pops, and the shares closed at a little over $100. Then what happened? They sort of went down. By September 3, Google shares were at $100.01, lower than the closing price on opening day. Then what happened? You know what happened. Google is at $600/share now, and hit $700/share in December 2007 (those were the days).

Why do I bring this up? Because I have been fascinated with IPOs for a long time, and I have written three articles about underpricing here, here and here. Reading about the Facebook IPO, all the questions, criticisms and insights seem very familiar.  So, once and for all, I think we need to come to terms with two things, teach journalists about these two things, and then calm down about IPOs for the rest of the history of capital markets.

1. First-day pops are meaningless.  Say my house is worth $300k.  If I list it for $290k, and someone buys it and then immediately resells it for $300k, then this doesn't mean my house is worth any more than if I had originally listed it for $300k and it sold.  Or, if I listed it for $310k, and the buyer resold it for $300k.  These are all $300k houses.  In the first instance, I left some money on the table, which makes the second instance more attractive to me.  But none of these scenarios changes whether my house is worth $300k or not.

Now, some people would argue that pop creates value.  That if onlookers see someone resell my house immediately for more than she paid, they will be attracted to my house and may purchase it from the second buyer for more than $300k.  This may in fact be true, given the amount of uninformed trading associated wtih IPOs.  But, eventually the price will return to $300k.  If the pop creates value, it is created for someone other than the seller.  The argument that the seller benefits is tenuous -- the seller may reap the benefits in a follow-on offering or via "good feelings" for its retail brand.

Could the absence of a pop destroy value, even if temporarily?  Maybe.  The confusion and criticism over the Google IPO may have caused its price to struggle the first few weeks.  But then fundamental value caught up.

2. First-day pops are meaningless.  It bears to be repeated.  Studies have shown that firms with the biggest pops (60% or more) have the worst one-year returns of all issuers in that same year.  Anecdotally, we know that some firms with the largest pops (Webvan, mp3.com, VA Linux) don't even exist in the same form any more.  First-day pops are not correlated with long-term value.

So, was Facebook's IPO successful?  This all depends on what the definition of success is.  If "successful" means "had an initial offering price that rose on the first day," then no.  If "successful" means reaped the optimal amount of capital for its shares, then maybe so.  I think it's interesting to think about the Facebook IPO with the Google IPO in mind.  That IPO was considered unsuccessful by many.  There were technological glitches.  There were last-minute disclosure snafus.  It was August.  It was a slow time for technology IPOs.  At the last minute, a bunch of insiders sold their shares, too.  Rumors suggested that Google paid a very low commission to its lead underwriter.  None of these things had anything to do with the fundamental value of Google, and time bore that out.  I say let's see.

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