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A Squib Round

In shooting a squib round is one with insufficient powder to push the bullet completely out of the barrel. Unlike a dud, there is sound but the barrel is plugged.

That is essentially what happened with the Facebook IPO today but the BBC is more polite: Facebook shares see modest debut

Facebook shares ended their first day of trading at $38.23, barely above the company’s initial pricing of $38.

Shares in the social network rose more than 10% to $42 within minutes of trade beginning, before quickly falling back.

Later gains were wiped out too at the end of a volatile day’s trade, as the firm’s debut on the Nasdaq exchange was also delayed by a technical glitch.

The stock’s underwriters had to buy shares to support the $38/share price, so the actual market price was below that level. NASDAQ was off by 1.24% for the day, joining the down trend in all of the major markets.

I see the press erroneously reporting that principals in the company are now millionaires and billionaires because they own stock that is now being traded. They have paper, not money. Their stock is only worth what someone is willing to pay for it if they sell it. If no one wants to buy the stock, they are broke. That is the dirty little secret of owning stock, as a lot of people with 401Ks have discovered.

Why would anyone buy Facebook stock at a price-earnings ratio of 100 [it would take a hundred years for current earnings to make that much money]. This was heavily promoted by the underwriters and the media, and no one cared. The people with money to invest, are investing it in T-bills, not Internet companies.


1 Badtux { 05.19.12 at 12:14 am }

Their pre-IPO stock options are listed at like 5 cents per share, so even if the shares fall to $3 per share like the P/E ratio implies they should, the founders of Facebook are still going to be millionaires six months from now when they exercise their shares and sell them. (Typically the VC’s require the 6 month embargo before they’ll fund you, they want to take their cut first before the stock price collapses).

Yeah, I got enough worthless stock option sheets to paper my wall with, courtesy of working for startups since 1998. And your point is? ;).

– Badtux the Serial Startup Penguin

2 Bryan { 05.19.12 at 12:36 am }

I know a lot of people with that same type of ‘wallpaper’, Badtux. It ain’t real unless it is in cash or actual physical assets.

With stock, a house, a car, etc. it is only worth what someone is willing to pay for it when you want to sell it. Who knows if there will be a market for the stock in 6 months? They can now sell it as it is listed, but if things don’t start turning around, nothing much may be selling in 6 months.

3 Badtux { 05.19.12 at 1:20 pm }

They can’t sell it now, Bryan. 6 month embargo. Part of what they agreed to when they took the dough from the vulture capitalists. But you better believe they’ll be selling six months from now. They’re not idiots.

And six months from now, the only way Facebook will be below $1/share will be if Facebook goes bankrupt or the entire stock market collapses. Not happenin’. And as long as Facebook is above $1/share, Zuke and pals make money when they sell their exercised options, LOTS of money, because I can also guarantee you that the options they got back when Facebook was a startup were for some ridiculously low price like 1.67 cents per share.

4 Bryan { 05.19.12 at 2:22 pm }

Badtux, I understand about the embargo, but I have seen people who had stock that was in reasonable companies who couldn’t sell it because no one was interested in buying it. The situation had nothing to do with the viability of the company or the stock market, just a lack of interest.

We have been riding the edge of deflation for a while, and there are a lot of people who aren’t buying anything. If there are no buyers, even gold is worthless. This is the situation in some real estate markets – everyone with money is waiting for a lower price.

These guys may all become millionaires and billionaires, but they aren’t at the moment, and the indications are that the market price on the stock is definitely below the opening price. The underwriters may take a bath on this IPO.

My point is that people should not start extending them credit until they actually have some cash, rather than just the possibility of cash.

With what is happening in Europe, a slip back into an ‘official’ recession is a very real possibility in the US.

I know I’m being pessimistic, but I’ve seen a lot of ‘downturns’ in my time on the planet, and I have no confidence the ability of the people currently in charge to do the correct things.

Full disclosure: I’m not on Facebook; have no intention of ever being on Facebook; have no interest in the idea of Facebook. The closest I have come is some links to coverage of some of the sporting events I follow.

5 Badtux { 05.19.12 at 6:27 pm }

Bryan, I know someone who made a couple million bucks on one of the dot-com stocks, one of the last to go public before the bottom dropped out. He had been a competitor of the dot-com and was so successful at doing so that they bought him out by hiring him and giving him a bucket load of stock options in addition to a good salary. The stock issued at $38, soared up to around $150, and crashed down to about $1.50 by the time he could exercise his options and sell it. When you’re getting your stock for 1.67 cents per share, it’s hard to lose money on it unless the company goes bankrupt within the next six months — which is not bloody well likely if they hauled in a huge bucket of cash with the IPO.

I’ve never run into the case of someone not being able to sell stock in a profitable publicly traded company 6 months after IPO. They always were able to sell it. Maybe not for the price they wanted, but (shrug) so it goes.

6 Bryan { 05.19.12 at 10:52 pm }

It wasn’t six months after the IPO, but I know a couple of guys who couldn’t sell stock for weeks, which put one of them into a very serious bind and heavily damaged his credit rating. He was trying to buy a house and was going to use the money from the stock for the down payment. He spent several more years as a renter because of it. Of course, he is in much better shape today because he eventually sold all of the stock he owned and put the proceeds in CDs and T-bills.

I don’t wish the guys in Facebook ill, I just don’t have any trust in the stock market and know the limitations.