The Facebook IPO Boondoggle

May 25, 2012 Updated: October 1, 2015
Facebook shares at the Nasdaq stock
A television anchor stands in front of screens showing the start of trading in Facebook shares at the Nasdaq stock exchange in Times Square on May 18. Facebook shares saw an opening pop fade Friday as the wildly popular social network made its long-anticipated market debut. (Emmanuel Dunand/AFP/GettyImages)

News Analysis

NEW YORK—It was supposed to be an initial public offering (IPO) for the ages, a coming out party for social networking, and a beacon of hope for Silicon Valley and the Internet 2.0.

The buildup was there. In anticipation of Facebook’s stock listing, lesser social networking companies had successful IPOs, which served as a litmus test of investor appetite for new-age Internet companies. By all accounts, the successful IPOs by LinkedIn, Groupon, and Pandora were supposed to buoy the prospects of Facebook.

It wasn’t just a financial boon. Facebook inspired an Oscar-nominated movie, and its precocious CEO has served to raise the status of hooded sweatshirts the world over.

All of the above reasons make the spectacular failure of Facebook’s IPO hard to fathom. By now, we had expected Facebook (Nasdaq: FB) to be flying high, but the stock is languishing below its IPO of $38, stabilizing in the past two trading sessions after large losses during its first two days of trading.

The IPO serves as a reminder that Facebook, at its heart, is still a business. Despite its aspirations of having a hacker culture, being a maverick, and progressive attitudes of its executives, the IPO served to give a massive windfall to a select group of early institutional and sophisticated investors, venture capitalists, and company executives and employees (a.k.a. insiders).

Plenty of Blame

Most IPOs are expected to enrich a select few, but in this case, Facebook was also expected to be a viable stock for the masses. With a household brand name, and 900 million-plus users around the world, Facebook was expected to rise following its IPO, not crumble under its own weight.

Some investors are blaming Morgan Stanley, the investment bank serving as lead underwriter. It was a hard-fought victory for Morgan Stanley to be named lead underwriter, but that dream has quickly turned into a nightmare as the company faces multiple lawsuits and regulator probes.

In the days leading up to the IPO, Morgan Stanley and other banks cut their earnings estimates for Facebook, as the company disclosed that ad revenues were not growing as quickly as its user base. Some investors claimed that Morgan Stanley distributed updated offering documents to certain investors but others were not notified. This claim is part of the reason Morgan Stanley was recently probed by the Commonwealth of Massachusetts.

While Morgan Stanley has made millions on the IPO—as reported by the WSJ on Thursday—via what is essentially the shorting of Facebook stock, it is now at risk of being penalized by the regulators.

The Nasdaq Stock Exchange is also under fire for technical glitches marring the first day of trading last Friday. The flood of orders—buy orders from new investors and sell orders from previous investors and the investment banks—temporarily overwhelmed Nasdaq’s systems, delaying the IPO on Friday morning.

“”Orders placed by investors seeking to purchase Facebook shares during the first trading day often took hours to execute,” Phillip Goldberg, who sued Nasdaq over botched orders, said in a complaint filed in New York.

“In the meantime, the investors seeking to purchase those shares had no idea if their trades had executed, and, accordingly, had no idea if they owned Facebook shares at all.”

Facebook closed Thursday up modestly, finishing the trading day at $33.03, which is still 13 percent below its IPO price.

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