How Can I Get In On The Facebook IPO?

This is the Question of the Week. I have had no fewer than ten people - clients, friends, relatives - e-mail or call me asking how they can buy shares of Facebook in their IPO, which the company recently announced. Well, there's some good news and some bad news. First let's start with the bad news and get that over-with...

For the majority of individuals, it is all but impossible to buy shares of an IPO (Initial Public Offering). When a privately held company makes the decision to sell their company to the public, they do it for a variety of reasons. The most typical reasons are to raise additional capital for expansion, to pay back debt they have accrued over the years while expanding (think of it like refinancing a mortgage), to provide the various private owners and employee owners with "liquidity" - a way to get their money out of the company, or as a way for the founders to exit the business. 

So when the company "goes public", they hire an "underwriting" firm (investment bank) to manage the deal (in the case of Facebook, they have chosen Morgan Stanley as their lead underwriter), plus some other investment banks (the "syndicate") to assist in the distribution and selling of the shares of stock. Typically, the first investors to be "allocated" shares of the IPO are institutions (such as investment banks, brokerage firms, and Investment Advisors such as mutual funds), followed by wealthy investors that are clients of the underwriting syndicate. Seems unfair, right? Well, the problem is, offering shares of a not-yet-public stock to thousands of small investors would be expensive and inefficient, and take a lot of time. Since the shares do not yet trade on an exchange, there are very specific rules outlined by the SEC regarding the process of bringing the shares public.

But the GOOD NEWS is that once the IPO shares are allocated and sold, and begin trading on a public stock exchange (such as the NYSE or NASDAQ), then the general public is now able to buy shares at the current market price, which may be higher or lower than the IPO price. In many cases, especially high-profile technology stocks, the stock price will tend to jump immediately upon becoming public. Although we don't yet know when the shares will begin trading, it will most likely be a few months before they are available to the public.

That's just a brief overview of the very complex IPO process. Of course, the natural follow-up question has been "so should I buy shares of Facebook once they go public?" Unfortunately, I can't give an opinion on that in a public forum like a blog post or article (I do give my opinion to individuals that ask me). It will be up to each of you (and the help of your advisor, if you have one) to decide that. But what I will tell you is that buying shares of an IPO stock is not unlike buying any other stock. It requires careful thought and analysis. In fact, it probably takes MORE thought than buying a typical, mature stock, because there is not a lot of public reporting data available to analyze. If one were to consider buying the stock of a company like Coca-Cola or Home Depot (mentioned only as examples), you would have years (decades even) of historical operating data to analyze and form an opinion. This is not always the case with a non-public company.

Robert C. Henderson is the President of Lansdowne Wealth Management in Mystic, CT. His firm specializes in financial planning and investment management for individuals approaching retirement or already in retirement, with a focus on the particular needs of women that are divorced or widowed. Mr. Henderson can be reached at 860-245-5078 or bhenderson@lwmwealth.com. You can also view his personal finance blog at http://lwmwealth.com/blog and the firm’s website at http://www.lwmwealth.com.