Facebook Shares Tumble on Day Two

May 22, 2012 Updated: October 1, 2015
The share price of Facebook stock is displayed on a screen at the Nasdaq stock market after it went public on May 18, in New York. The share price of the social network site tumbled 11 percent on Monday, delivering a black eye for those involved in the initial public offering. (Spencer Platt/Getty Images)
The share price of Facebook stock is displayed on a screen at the Nasdaq stock market after it went public on May 18, in New York. The share price of the social network site tumbled 11 percent on Monday, delivering a black eye for those involved in the initial public offering. (Spencer Platt/Getty Images)

NEW YORK—Newly minted shares of Facebook Inc. (Nasdaq: FB) tumbled out of the gate on Monday, delivering another black eye for those involved in the initial public offering (IPO).

Facebook shares fell as much as 13.7 percent on Monday, before rebounding slightly to close at $34.03, or a 11 percent decline, for the day. The closing price was a far cry from the $38 per share IPO prices from the previous week.

The social networking giant’s IPO netted a huge amount of money for venture capital investors of the company, Facebook’s employees, and other early private investors. It also established Facebook at a value of roughly $100 billion. But the IPO is widely considered a flop for almost all others involved.

Firstly, book runner Morgan Stanley & Co. reportedly had to prop up the share price last Friday—by continuously bidding for the shares—to prevent Facebook’s stock from “breaking” its IPO price of $38 per share. Breaking the IPO price is Wall Street parlance for a company’s shares closing below the IPO price, which is considered to be embarrassing for the bankers as it is an indicator that the bankers overrated the company’s value.

Secondly, retail investors who bought Facebook on Friday at close to the IPO price would have seen their investment tank on Monday. Those hoping for an immediate pop in stock price—similar to that experienced by LinkedIn and Zynga during its IPO—were sorely disappointed.

But nobody lost as much money on Monday as Facebook CEO Mark Zuckerberg, whose $19 billion stake in the firm was cut by $2.1 billion in a single day, after the company’s shares posted the 11 percent decline.

“All this could well have amplified the risks of a mistake, which investors can make—namely, to overpay for a very familiar and hyped name,” wrote PIMCO Co-Chief Investment Officer Mohamed El-Erian in a CNBC column. “Indeed, the behavioral finance literature cautions investors against falling into the trap of letting familiarity trump risk-adjusted valuations.”

Others blamed the underwriting banks for overvaluing Facebook’s worth.

“This thing should have been half as big as it was, and it would have closed at $45,”
Wedbush Securities analyst Michael Pachter said in a WSJ interview. The stock fell as low as $33 on Monday.

Nasdaq Under Fire for Glitches

Facebook shares also were faced with some technical issues last Friday, as the Nasdaq Stock Exchange’s systems were unable to handle the flood of orders in the morning, prompting Nasdaq to delay the opening of Facebook trading by 30.

Brokers and traders who entered their trades into the system Friday morning were not confirmed of their orders until hours later, and in many cases, the price executed was far different than previously thought. This left some brokers having to eat the difference in price quoted to their clients and the actual price of the executed order.

Nasdaq confirmed the issue, and the electronic exchange is also facing claims from brokers and investors saying that the delay cost them profits. In a conference call with reporters, Nasdaq on Sunday said that 30 million trades were affected on Friday morning, with roughly half of the trades having some kind of dispute in price after they were executed.

The New York-based exchange said on Monday that it has set aside some cash to reimburse traders and brokers who were affected by last Friday’s issues. The Financial Industry Regulatory Authority (FINRA), an industry regulator, is expected to oversee the arbitration and distribution of funds related to this matter.

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