The Facebook high-profile stock market launch offers us an opportunity to examine this much neglected facet of modern business practice in our country.
In Guyana, for any number of reasons, our attempts to establish a stock market with the ancillary institutions to service it have failed to gather any traction. This is one of the major reasons for the dearth of entrepreneurial activity in our country since the investor has to persuade risk-averse banks to offer them loans.
To cover its self-defined high risk, local banks demand such an extraordinarily high rate of interest (14-17%) that all but the most enterprising (or foolhardy, from another perspective) are deterred.
In the world of stock markets, the company wishing to raise funds makes its initial public offering (IPO) or stock market launch, which is the first sale of stock by a company to the public. The initial stock price is set by investment banks the company is working with. In this transaction the latter are called ‘underwriters’, since they are ‘underwriting” or guaranteeing that the price the stocks will be offered to the public later will be accepted.
It is a process that is carefully calibrated not to be too high to scare away investors or low enough that the initial owners of the stock could have made a much more substantial profit in later trading on a stock market. In the case of Facebook, it made its IPO on February 1st through Morgan Stanley, JP Morgan, and Goldman Sachs, its lead underwriter. Its stock was priced at $38 dollars and the company realised $16 billion from the IPO – the third largest in US history.
When a company lists its securities on a public exchange, the money paid by investors for the newly issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of investors to provide itself with capital for future growth, repayment of debt or working capital. A company selling common shares is never required to repay the capital to investors.
So it was with great fanfare – and anticipation – that the trading of the Facebook stock was launched on May 18th on the lesser known NASDAQ stock exchange. The launch was not auspicious – there was an unprecedented delay of half an hour – and when trading actually began a number of ‘technical’ hitches caused a number of significant snafus. But the bottom line was that the stock actually traded during the day at $38 and giving the company a value of $104 billion. Mark Zuckerberg, who just turned twenty-eight four days before the launch, was now worth some $20 billion.
However, details are now coming out that the glitches actually served to prevent the stock from dropping below $38 and that the underwriters had to also intervene massively to prevent that eventuality. Additionally, it appears that its underwriters had details of lower than expected earnings but only passed this information to certain clients who took the opportunity to unload their stocks early in the day. The price to earnings ration of the stock to begin with was at an incredible 100:1 ratio and many had felt the IPO was overvalued. The stock is now trading at 16% of its initial price and the company has already been taken to the courts for the alleged malpractices.
The last really significant IPO in Guyana was by Peter D’Aguiar’s Banks Breweries back in the 1955. But apart from other affiliates of Banks going public, other entrepreneurs have been very sceptical even though the benefits are quite extensive: Bolstering and diversifying equity base; enabling cheaper access to capital; exposure, prestige and public image; attracting and retaining better management and employees through liquid equity participation, etc.
While there may be significant legal, accounting and marketing costs, the business becomes more accountable because of ongoing requirements to disclose financial and business information in a timely fashion.