Wednesday, May 23, 2012

Problems with Facebook's IPO

Facebook’s shares have fallen again as concerns start to emerge about information disclosed to investors prior to the IPO.

Facebook’s shares have fallen again by 9% as regulators suspect that some investors might have been treated favorably during the disclosure process. The shares closed at $31 on Tuesday, more than 18% less than the offering price. The Securities and Exchange Commission (SEC) and the Financial Industries Regulatory Authority (FINRA) have decided to review the process.

SEC Chairwoman Mary Schapiro, while speaking with the press said, “There is a lot of reason to have confidence in our markets and the integrity of how they operate, but there are issues we need to look at specifically with regard to Facebook,”

The lead underwriter of the IPO Morgan Stanley (MS) maintains that the IPO was "in compliance with all applicable regulations". Pen Pendleton, spokesperson for MS, wrote that the company “followed the same procedures for the Facebook offering that it follows for all IPOs,”

Analysts have long suspected Wall Street of extending unethical and illegal support to big investors. A shocking news that was revealed earlier this week has all but confirmed Wall Street’s questionable practices. Morgan Stanley (MS) had reduced Facebook’s future revenues forecast, just days before the IPO, a crucial piece of information that failed to reach the small investors, but Reuters has reported that the information was passed on to MS’s major clients. Other underwriters of the IPO, Goldman Sachs and JPMorgan Chase had also reduced the company’s future revenue expectations.  

In short, 'institutional investors received valuable information that retail investors did not', but this is not a surprise, it happens every day and in each IPO, all the small investors are aware of this situation. Most consider it as one of the primary issues facing this industry, not just in U.S. but around the world.


There are literally dozens of analysts who are convinced that “Facebook is overvalued”. Thomson Reuters Starmine had predicted 10.8% annual growth rate for Facebook. The figure is not an exaggeration neither an understatement as this is almost exactly similar to the average annual growth rate of technology sector. At 10.8%, Facebook’s share price comes down to just $9.59 per share.


Facebook, Morgan Stanley and Nasdaq are all pulled together in this scandal, but Nasdaq’s executives and its shareholders aren’t worried about the situation. On its exchange operators annual meeting, none of the top executives received any questions from the shareholders regarding its handling of the Facebook IPO. Nasdaq’s CEO Bob Greifeld was quoted as saying "While clearly we had mistakes in the Facebook listing, we still want to highlight the fact that it was the largest IPO ever and on Friday of last week, we processed over 570 million shares,"

On the other hand Richard Laermer, CEO of ThankBank, who has invested a considerable sum in Facebook’s IPO believes that the investors will turn out to be winners in the long run. He said, "There's no way I will ever lose money off a stock from a network with 900 million users. It's not physically possible,"

Worst IPO of the decade 

(Updated 26th May, 2012)

After five days of trading, Facebook's IPO is now, according to Bloomberg, the "worst IPO of the decade". Furthermore, the current forecast presents tougher times ahead. Bloomberg has compared the current IPO with some previous failed IPOs, including that of MF Global which holds the spot for eighth largest U.S. bankruptcy. 

Interestingly, 'problems with the IPO' started even before the IPO had officially begun. Apparently, NASDAQ's had some issues with their software which delayed the IPO by about half an hour. This caused some confusion among brokers who weren't sure whether their clients orders were processed.   

The table below shows the percentage increase or decrease in share prices from the IPO price in five days of trading. Facebook came down from $38 to $33.03

  •  Apple                 142% 
  •  Microsoft             31% 
  •  Yahoo                125% 
  •  Amazon                 -7% 
  •  eBay                   150% 
  •  Google                  25% 
  •  LinkedIn              110% 
  •  Facebook             -13%  

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Sarfaraz A.K.
Half Bridge Business News