Why Facebook's IPO flopped

Furious shareholders are threatening to sue; they can't understand how the country's second largest IPO ever bombed.

Farhan Rashid June 05, 2012
The initial excitement associated with this biggest ever deal for Nasdaq has faded away. Facebook's share prices continue to plummet with the share price reaching a new low of $26.9 today. The original price set by the Facebook team was $38.

The drop in Facebook’s share price wiped more than $11 billion off the company’s market capitalisation with Bloomberg declaring that "the IPO produced the worst five-day return among the largest US deals of the past decade."

The latest news that disgruntled shareholders are furious over Facebook's IPO performance, and cannot wrap their heads around how the country's second largest IPO ever flopped. They are threatening to sue Facebook and this is not helping the situation at all.

One of the biggest IPOs in history, Facebook’s team failed to capitalise on the hype associated with this event.


Everyone is wondering as what went wrong, in a matter of few days, as the rest of the stock market rallied in the same period. A lot of investors are wondering what exactly changed to cause this downward spiral; one thing is clear, nothing seems to have changed in the fundamentals of the business. Facebook still has more than 900 million users and this IPO theoretically should have only enhanced the reputation of the business.

However, this did not quite happen, and there is some very interesting news coming out, despite no official verdict from either Facebook executives or even Morgan Stanley - the lead underwriter in this IPO. Surprisingly, there is complete silence from both sides which is only making the things worse for the stock price.

One significant and highly unusual event that took place was when "Facebook's lead underwriters Morgan Stanley, JP Morgan, and Goldman Sachs, all cut their earnings forecasts for the company in the middle of the IPO roadshow," as reported by Reuters. 

This was a highly negative move, hardly ever heard of in recent history.

The main reason behind this seems to be that an inside executive working for Facebook was aware of the business’s performance, and asked them to do so. The second quarter's performance was expected to be below the original estimates set by the analysts.

However, here comes the shocking news; this piece of vital information was only disclosed to the underwriters, which resulted in the estimates being cut and the information subsequently being only shared with the sophisticated investors, verbally, who were interested in buying Facebook shares. This, according to my layman knowledge, qualifies as 'insider trading,' a crime for which Martha Stewart was sent to jail.

The small investors were left completely out of the loop. This discrimination is not only unfair to the small investors but also against the fundamentals of securities laws.

Naturally, as the news of this event is spreading, it is having a deeply negative impact on the share price of the company. Interestingly enough, no one can predict how face the stock price is going to plummet.

Also adding to the steep plummet was the issuance of an additional 25% of shares - a tweak added just three days before the IPO, due to an 'extraordinary' demand. These shares came from the early investors such as Goldman Sachs and venture capitalist Peter Thiel. This, naturally, raised the alarm bells for new investors as they began to wonder why these firms would not like to hang on to these shares if they believed the stock value will rise. This resulted in a lot of emotional trading resulting in the share price dropping to levels no one expected even a few days ago.

Facebook’s IPO was a litmus test for all other social networking sites. It raises the question as to whether there is enough potential in similar business models to go public. Groupon's poor performance in the stock market these days is suggesting otherwise.

So far, even though Facebook has not failed, we can safely say that the IPO has not been a success of the magnitude that was expected from it. The stock valuation of $28 to $35 was the original price set by Facebook, while later on the range was increased to $34 to $38. This raised the question as to whether the firm behaved ethically or not; did they know that the analysts had lowered their estimates?

Anti-Wall Street Campaigners have been given yet another reason to question the integrity of the investment bankers and financial institutes. Wall Street insiders, yet again, managed to get preferential treatment in the form of privileged information while the the small individual investor suffered at the hands of one of the biggest IPOs in history.
Farhan Rashid Is a Chartered Management Accountant by profession with a CIMA qualification and a Master's in Finance from a leading UK business school. He has been based in London for the past twelve years and works in the stock brokerage industry, though he is originally from Islamabad. He tweets @farhanrashid76
The views expressed by the writer and the reader comments do not necassarily reflect the views and policies of the Express Tribune.


CharlieUsman | 11 years ago | Reply @Farhan: This is not a story dude.
Farhan | 11 years ago | Reply @FR: This was no blog but news story. No analysis from your own side. So you should have at least cited the sources. I am not into fiction but this is unethical to use someone else's story without citation
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