The process of issuing shares of a private firm to the public in a fresh stock issuance is referred to as an initial public offering (IPO). An IPO allows a firm to raise funds from the general public. The move from a private to a public firm, which often involves a share premium for existing private investors, can be a crucial opportunity to ultimately realize rewards from their investment. Entering the public market for the first time has a lot to do with the expected demand and returns. For this reason, companies call for investment banks to estimate the demand and set prices.
The case of Facebook’s IPO reveals an instance where the lead underwriter, Morgan Stanley, overestimated demand and overpriced the shares. Facebook’s IPO was offered at $38 per share, a price that drastically fell soon after purchase (365 Careers 1). The failure is attributed to insufficient market research and over-ambition. In comparison, AT&T Wireless presents a case of one of the most successful IPOs in history. AT&T Wireless’ decision to offer its shares in an IPO came at a time when other tech companies were withdrawing due to the fall in prices that was witnessed at the time. With its shares valued at $30.12 to $31.75, the company generated $10.62 billion in capital (Ghosh 2). The months that followed saw the company grow, attracting more investors. The company was named the most successful in American history and held the title for at least six years.
Comparing the two IPOs, it is clear that selling when stock prices are high does not necessarily imply a successful IPO. In addition, sufficient market research should be done to ensure that underwriters do not overprice the shares. Facebook highly-priced its shares when the stock market price was high, with the expectation of growth. AT&T Wireless effectively estimated a rise in stock price and sold its shares at an affordable price generating high capital.
365 Careers. Facebook’s Initial Public Offering – An IPO Case Study [Video]. YouTube. (2018). Web.
Ghosh, Arvin. Pricing and Performance of Initial Public Offerings in the United States. Routledge, 2017.