What the hell is happening with Facebook? Just days after the world's top social networking website made its lacklustre debut on Wall Street, sordid details are emerging about what went on behind the "biggest technology initial public offer in history'. The details get more troubling every day, even as Facebook's shares sink further below the offer price.
Many of the allegations still have to be proved, but without a doubt, they are enough to cause investors, especially ordinary investors, to feel they've been fleeced in some way.
Here are nine reasons why Facebook's IPO is starting to look more and more like a messy flop:
One, Facebook’s shares are now down to $31, 18 percent below the offer price of $38. Anyway you look at it, that's a flop. It’s an even poorer show when you consider the stock has lost a whopping 30 percent from its peak of $45 hit on listing day. And remember, Facebook's shares listed on 18th May, just five days ago.
You can bet on one thing, with all the troubles swirling around the company, more stock losses are in store.
Two, details are now emerging of what went on behind the scenes of Facebook’s Wall Street debut, which was pockmarked with technical glitches.
A Reuters report sparked investor outrage after it revealed that research analysts at the lead underwriters to the IPO (Morgan Stanley, Goldman Sachs and JP Morgan) had cut their revenue estimates for Facebook, based on an amended 9th May filing by Facebook with the regulator. During the IPO’s roadshow. Oh, by the way, it was NOT disclosed to the market before the stock was listed. The information was passed on only to some large institutional investors. According to US experts, that's unprecedented. Not to mention appalling.
Three, it gets worse. By Wednesday, reports said the underwriters' analysts cut their estimates because a senior official from Facebook who knew the business was weak told them to do so, according to this exclusive Business Insider story.
So, it looks like Facebook and the underwriters knew the performance of the company would be below par, and decided to share those details with a select few. Small investors, the ones who would have been most eager to lap up Facebook shares on listing day, were kept completely out of the loop. What happened to the notion of "a more open and connected world", Facebook?
Four, if investment banks were reworking their revenues forecasts for Facebook, why on earth did the company’s shares get offered at $38, which gave Facebook an astronomical 107 price-to-earnings (P/E) ratio? In comparison, Apple Inc, whose shares trade around $555 , has a P/E ratio of around 13, according to this Bloomberg report. That should have given most investors reason to run away from the stock offering, so why did the underwriters decide to price the stock at that level? It also left very little room for a first-day pop in the stock price.
(Of course, given the jaw-dropping valuations, if you were a really smart investor, you would have stayed away from the offering altogether.)
Five, there's little doubt that the 'smart money' got out when the biggest tech IPO in history listed on Nasdaq. Nearly 60 percent of the stock sold on listing day came from insiders, compared with 37 percent for Google when it went public in 2004, a report by Bloomberg said. Goldman Sachs sold about half its stake, the report said. “If you really thought that 12 months later the stock would be 50 percent higher, you wouldn’t leave that on the table,” Erik Gordon, a professor at the Ross School of Business at the University of Michigan, told Bloomberg.
Six, despite cutting Facebook's earnings estimates and pricing the stock at sky-high valuations, the company increased the number of shares being sold in the IPO by 25 percent just days before its stock listing to a whopping 421.1 million shares, claiming high demand. Given the shaky financial performance of the second-quarter, was that greed talking? Again, such a high supply of shares acted as a cap on first-day gains for the stock.
Most technology shares gain an average of 32 percent on the first day. To be fair, Facebook’s gains were estimated to be modest rather than average. As it turned out, it was less than modest and closer to zero.
Seven, Facebook’s listing on Nasdaq was hampered by technical glitches throughout the 18 May session. Its system was unable to seamlessly process its buy, sell or cancel orders and now at least one investor has sued the exchange claiming that it “badly mishandled” Facebook’s trading. It has simply added to negative sentiment around Facebook's stock.
Eight, the stock — and the IPO — has now caught the attention of the Securities and Exchange Commission, the US regulator for stock markets, which has said it will review Facebook's first-day trading. The 'selective disclosure' of information has also raised eyebrows of the authorities.
Nine, the whole IPO decidedly tarnishes the image of tech offerings. Facebook was supposed to be the hoodie-wearing brigade dictating to suit-wearing Wall Street what it wanted and how it would come to market. The hoodies were supposed to be renegades, and able to stand up to the suits. So, are the hoodies no better than the suits?
Facebook, no more 'likes' for you.