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The Facebook Flop
The Facebook Flop
on May 29, 2012
Unless you have been living under a rock for the past couple months I am sure that you have heard the news of the world’s largest social networking site, Facebook, “going public”. Although you may not know exactly what this means, you probably also noticed that something went terribly wrong with the initial public offering (IPO) of the stock, resulting in Facebook (
on the NASDAQ exchange) to drop a whopping 16.9% in its first week of trading. In a two part series I will look to examine what exactly took place in this latest tech IPO. Secondly, I will examine how Facebook’s IPO compares to other historically significant IPO’s in the past several years and what the future holds for investors and the company.
“Going public” refers to a company offering its stock to be traded on a publically traded market, such as the NASDAQ stock market in this case. The benefits of going public for a company from a financial perspective are immense. Going public can generate millions of dollars from shares sold to the public. Before an IPO it can also be difficult to tell exactly what a company is “worth”. This is especially difficult for a company like Facebook, which does not produce a tangible product that can be made, sold, and counted to give a sort of estimate of the worth of the company. A publically traded stock has a moving price, which indicates how the public views the company and its worth. The initial price of the stock offering is usually set through negotiations between the company and the main underwriters for the IPO, in this case Morgan Stanley. The underwriters are investment banks that act as a middleman between the company and the public. They raise capital, structure the securities that will be offered, and overall handle the Wall Street side of the IPO. The difficulties Facebook encounter in its initial public offering on May 18th, 2012 were the result of a double-edged problem, which will take weeks if not months to unravel.
Although stock trading on the NASDAQ stock market opens at 9:30 AM EST, FB was not scheduled to begin trading until 11:00 AM EST. This is not atypical for IPO’s because an extra couple hours allows traders and the markets to prepare for a blockbuster IPO such as Facebook as well as make pre-orders for when the stock does open on the exchange. When 11:00 AM EST came there was still no trading, leaving hundreds of investors and traders unaware of whether or not their pre-opening orders requesting trades where fulfilled or not. It was not until around 11:30 AM that Facebook actually began trading with over 570 million shares changing hands within the first several minutes. The stock price moved up from this high level of demand, but investors soon realized there was a problem. Traders were not receiving confirmation that traders were completed and many received trades at unexpected price levels. It turns out that the system that NASDAQ used to match up buyers and sellers before the stock officially opened had a technical glitch, throwing off the entire market for the stock. NASDAQ reported that the system created unexpected loops because of many traders submitting changes to their orders, and in order to remedy the problem the exchange switched to another system. It appears however, that many of the orders during the switch were never completed, further complicating the problem. The ripple effect from this problem sent the stock price plummeting as investors and traders alike had no idea exactly how many shares, orders, or even the prices of orders they had. The result of all this taking place is that for the past several days, and the next few weeks NASDAQ will be attempting to unravel the mess that has been made while also having to deal with the many traders who lost thousands, if not millions, of dollars from unexpected difficulties from the IPO.
The second problem with this IPO of Facebook is much less a technical problem, but more of a question of ethical behavior. A group of Facebook shareholders has recently sued the company for allegedly “selectively disclosing” information to big banks before the official IPO of the company. This news came this past week following reports that analysts at the lead underwriter for the IPO of Facebook received privileged information about Facebook’s upcoming financial outlook. After the alleged information sharing Morgan Stanley and three other major investment banks involved in the underwriting of the IPO (Goldman Sachs, JP Morgan, and Bank of America) all simultaneously reduced their earnings outlooks for Facebook to extremely similar levels. Although this does not shed any light on exactly what information may have been shared, the fact that the earnings outlooks for all four major banks involved in the deal shifted to such similar levels appears to be more than a coincidence. This information, whatever it may have been, was not shared with the “common” shareholder of the company. Although a lawsuit does not usually affect a company significantly financially, except for any court costs and compensations it is ruled to have to pay, they do tend to have enormous downward pull on stock prices. This is likely an additional factor to the technical problems of opening day for the stock, which resulting in a spiraling downward stock price with many problems to face in the near future.
These two problems with Facebook’s IPO have made many investors weary of investing in the tech giant. Until these problems are solved it is unlikely that Facebook’s stock price will recover significantly as traders and investors will still view the company as being unworthy of the risk that investing in it entails at the moment.
5/28/2012 10:21:22 AM
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The Facebook Flop
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