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ServiceNow rescues the IPO market after Facebook

Flickr user Antonio Morales García

(MoneyWatch) When Facebook (FB) went public in mid-May, the process was so troubled that some assumed the IPO market would closed to tech firms through the summer. IPOs were "no longer an important source of capital," according to one commentator, only a way to transfer money from individuals to the big institutional investors who get the initial low price and then sell on the bump in price. No Facebook bump would mean everyone would come to their senses.

That prediction lasted for a few weeks until a recent round of IPOs, including ServiceNow (NOW). Suddenly, things seem back to normal. That may be because those watching from the sidelines don't get all of the market dynamics. According to ServiceNow CEO Frank Slootman, while Facebook weathered a lot of criticism, none of that really affected the possibilities of a tech IPO.

Stock diet

"We're much closer to a regular tech IPO" than Facebook was, Slootman says. The big reason was the size of the offering. "[Facebook] had sold a huge amount of stock prior to going public," he said in a phone interview. "Their stock was all over creation. That is not true for narrowly held companies like ServiceNow."

ServiceNow and its existing shareholders offered 9.7 percent of the total stock, a so-called low float that has seen criticism from the likes of television stock commentator Jim Cramer.

And yet, things can be a bit more complicated than that. Slootman, a veteran CEO who has been through the IPO process before, says that there are other factors at work. A big one is that putting a lot of stock onto the market at one time can spook investors. "You see a sudden increase in volume [so] you think someone knows something," he said. "These people are the epitome of paranoia. The marketplace has a tendency to under react or overreact because they don't have the context. That's why we don't disclose all our metrics to investors on earnings calls, because they can't handle the truth." (Slootman did admit that another reason was to avoid unnecessarily tipping his company's hand to competitors.)

Panic time

Facebook and its investors released a large amount of stock with insiders heavily bailing out, as Cramer put it right before the Facebook IPO. That, combined with technical trading problems and the high valuation reduced demand, causing the price to plummet. (Facebook's stock is still down about 15 percent from the IPO price.)

What ServiceNow wants to do is release stock over time so the market can absorb it without a whiplash reaction. But the company also has another stock advantage over Facebook because ServiceNow is addressing the well-known corporate software market, not social networks where the financial dynamics and realities are still largely unknown. "It's all real money," Slootman said. "There's far less mystique about what this is worth."

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ServiceNow had as lead underwriter Morgan Stanley, which was also the lead underwriter for Facebook. He thinks that the Facebook results weren't some grand plan to maximize the price that then fell apart. "They were spooked by the Facebook experience because some of their tried and true rules of thumb didn't seem to apply," he said. "They felt completely safe, and these guys are conservative. There's no upside to overprice an IPO. Morgan Stanley is the last company in the world that wants to overprice an IPO. They had, according to the book of orders, orders several times the amount they needed for the price."

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Controlling the volume worked for ServiceNow, as the price jumped 37 percent over the IPO price of $18. Slootman plans to focus now on "hardcore execution and scaling the business." And the market? After ServiceNow, tech companies may shake off the Facebook scare and jump back into the IPO market.

Image: Flickr user Antonio Morales García

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