Facebook and Zynga’s Upcoming IPOs: Should You Get Involved or Stay Out?
IPOs (initial public offerings) seem to have lost a small amount of their shine in the last decade, but the truth is that everyone still turns their heads every time a “big name” walks by and announces an IPO. Earlier this year it was Groupon’s initial public offering, last year it was the “new” General Motors.
Every time a company announces its initial public offering, many people want to “get in”; it’s obvious why: who among us hasn’t asked (at least to himself, if not out loud) “I wonder what would have happened if…”
• Would have bought Microsoft in the 1980s;
• Would have bought Apple when Steve Jobs came back on board;
• I would have bought Google at $85/share…
As a financial advisor, my goal is to ensure that my clients do not “should” on themselves.
(OK sidebar: In case you didn’t laugh during that last sentence, you should read it out loud. Go ahead…get it? “Should” on oneself? I can’t believe my comedy career has never unstuck…okay…back to our regularly scheduled programming)
It tempts you as it looks like quick money. Who doesn’t want to live in fantasy land for a couple of minutes every day? My fantasy investment purchase? Greek debt insurance 2 years ago. That’s some serious jenga. However I am digressing.
So here is the deal with IPOs and why they are not the most suitable option:
1. If you don’t have an “in” (think: your brother works for Facebook) you won’t get any IPO shares
This means that if you try to buy into Facebook’s IPO the morning it opens, you won’t receive the IPO price (which is what everyone on CNBC will be talking about). You will buy your shares at a different and often much higher cost.
2. They do not usually generate profits, at least not immediately:
As golden visions, we conveniently remember IPO “winners” like Google or Amazon. We block the long and tired pile of losers. Do you remember Pets.com? What about Vonage? They’re not dead, but that initial public offering was a disaster. electronic toys? Amazon.com, a gargantuan stock by today’s standards, went public in mid-1997…and didn’t make a percentage profit for several months. Google’s initial public offering took place in 2004. The stock saw a big surge and then was flat for 6 months. IPOs often don’t pay for a long time, even if they are winners like Google or Amazon.
3. Who makes the real money? The CEO, the executive team and the investment bankers. This can be a great cha ching! event for them.
The Blackstone Group, a private equity and asset management firm, announced in 2007 that it would go public. The issue attracted so much attention that no one really paid attention to the prospect.
Why does that matter?
Well, it turns out that The Blackstone Group’s IPO launch only included “part” of the business (not the part that made money, mind you). After all stock was gobbled up and the CEO and investment bankers dumped their shares (CEO made $2.6 billion loving “B” equity), any gullible shareholder suffered a 42% loss in the first 12 months. .
Here are our thoughts:
If you want to have a “cool new Zynga IPO” but don’t want to do the homework associated with reading the prospectus or befriending an employee to get the “insider” price, buy a mutual fund in that same space. If it’s as awesome as you think, the fund manager will buy some (probably at Zynga’s actual IPO price) and you’ll own some by proxy. If it’s a sham, the fund manager, who may have a thousand times more resources than you, is likely to pass, allowing you to easily determine if he passes as well.
Also, do you really think it’s smart to put every dollar you own into Zynga stock, even if you could? What is the best that could happen? Could your money be doubled? Triple?
Safe. But what is the danger?