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Facebook’s share price will probably surge on the day of its initial public offering, experts say, but the pricing of the issue should reflect longer-term investor demand.
The relatively small number of shares that will be put on sale, combined with the wild popularity of Facebook among its users and fans, creates supply and demand conditions that could send the price up.
“It all argues for seeing a big pop,” said Larry Harris, former chief economist at the Securities and Exchange Commission and now a professor of finance at USC Marshall School of Business.
Facebook set a price range for its stock of $28 to $35 a share, which would value the company at as much as $95.9bn. The unusually wide range indicates that the social networking site is taking a prudent approach to pricing, as it gauges investor demand in the wake of lagging first-quarter revenue growth.
“The company still has a very real task in front of it to convince investors that the growth is still ahead,” said Lise Buyer, an IPO adviser with the Class V Group.
While demand from individual retail investors is expected to be high, Facebook will want to measure the enthusiasm of institutional investors before raising the price and will do so only if those investors show unbounded excitement, she said.
But Facebook will still need to be cautious because such enthusiasm in the early days of trading could be unrealistic and it may take up to a week for the share price to settle down, Ms Buyer added.
However, that may not dissuade individual investors who are enamoured of Facebook and may not be sophisticated traders. Facebook recently indicated it would raise its allotment of shares to be sold to retail investors when it added E*Trade, a small investor brokerage, to its list of underwriters on Thursday.
“Because it’s such a high-profile deal, there is reason to think there will be an unhealthy amount of investor glee day one,” she said. “But we don’t know that will happen.”
The day one performance of other recent internet IPOs ranged from big pops to modest ones to slumps. Groupon shares jumped 50 per cent on its first day of trading, up from $20, then plummeted to about $10 in recent months. Zynga fell 5 per cent on opening day, from $11 to $9.50.
LinkedIn’s initial price of $45 leapt 100 per cent on the first day of trading, causing several analysts to complain that bankers underpriced the stock, which had the effect of funnelling profits to day traders, rather than the company. The price remains high, trading at about $100, and went up 8 per cent in recent days on news of solid first-quarter performance.
For its part, Facebook will want its stock price to pop to a certain extent on the first day, to create some excitement and demonstrate a healthy, sustainable demand, said Jed Williams, an analyst with BIA/Kelsey. The art will be in pricing it so it does not pop too much.
“Facebook will strategically price this thing, where demand is not completely defeated or uncertain, but there’s still enough buzz,” Mr Williams said.
Additional reporting by Richard Waters in San Francisco