The Facebook IPO launched on May 18th to a lot of fanfare. Almost immediately it fell. Though, even before it launched it had its own problems. Many people may have been talking about this as the biggest tech IPO of the decade but after being priced at $38, it opened at $42 and then quickly fell. It ended its first official week of trading at a low of around $31. Everyone scrambled around looking for explanations.
This IPO was supposed to be a boon, was estimated (according to a few analysts), to double its initial share price and make its march upwards. Let me help you get a sense of it all by providing you with a brief timeline of what happened;
The Facebook IPO road show kicked off. It involved a series of presentations in front of potential investors. This was done to get the demand for the stock going.
One of the Facebook executives tells the analysts at the four leading banks overseeing the IPO that they aren’t going to make as much money this quarter as they hoped they would. The analysts for their part, lowered their revenue estimates but didn’t reveal this information to the public.
Facebook makes the all important change to its S-1 listing, which is a document all companies have to file with the Federal Securities and Exchange Commission before they start trading. The new section that they added stated that there was a huge shift towards mobile usage and that this could affect how much money Facebook made.
On the same day, leading analysts at the four major underwriters – Morgan Stanley, Goldman Sachs, Bank of America and J.P. Morgan, reportedly (not confirmed) revealed to a few preferred investors that Facebook isn’t going to be making as much money as they first thought. Small investors and common investors (like you and me) were completely left in the dark.
From here out, it starts to unravel. Two days before Facebook is supposed to go public, they announce that they are selling an additional 83.8 million shares due to the high demand. They decided to increase the amount of shares common investors (mom-and-pop buyers) could buy from 500 to 5,000. Buoyed by the increase in supply, mom-and-pop buyers put in order for many more shares than what they wanted because they were told they won’t be able to get as many shares as they ask for as the demand is too high.
A day before going public, Facebook prices its IPO at $38 a share. Much more than what they originally planned ($28-$35). This should have been good news since a higher price is reflective of the demand and that the underwriters feel comfortable at the level of demand. The thing is, some investors were informed $38 is a little too high and that Facebook isn’t making as much money. Small investors, the ones who put in large orders, were left out of this knowledge.
A half hour delay (a technical glitch on the Nasdaq) put a damper on the stock. It was apparently with the computer system of the Nasdaq. Facebook started trading at $42.05 and finally became a publicly traded company. By the end of the day, Facebook closed up 23 cents to end at $38.23. The large investors had come in and sold their shares at $42 and the smaller investors were left wondering as why the stock dropped down so quickly.
By this time, Facebook’s shares were trading around the $31-$32 mark. Small investors who bought in at $42 were left ruing the decision they made. News reports were coming in as to what actually happened during the road show and the days leading up to the debut on the Nasdaq. The government and the SEC, the Financial Industry Regulatory Authority and more get involved and say they will review what happened.
The situation now
As of now, Facebook is trading at $31.91 up from its all time low of $31.11. Things aren’t looking good for the stock and neither for its CEO, Mark Zuckerberg. It isn’t looking good for the lead underwriters either.
Reports are trickling in as to how much money everyone has lost. Citigroup Inc’s Automated Trading Desk has apparently had trading losses of up to $20 million from the IPO. Market makers Knight Capital Group Inc. and Citadel Securities, both had losses of around $30-$35 million. UBS’s market-making arm lost about $30 million. All in all, the banks’ exposures made for a combined hit from Facebook of above $100 million. Now we can see that a growing number of lawsuits are being taken on against Facebook and Nasdaq for all the various problems.
It won’t just stop here
Small investors and even some large-cap investors are beginning to get annoyed by all the dealings at Facebook and Nasdaq. Apparently, Facebook has been talking about switching over to the NYSE. Only time will tell what will happen to the stock. Google and Apple and even LinkedIn have all had better launches. On the other hand, Groupon, Zynga and Yelp have largely been on the downfall.
Where will it close this week? Will it be higher or even lower? Can it rise above the $38 initial price or will it drop below $30? Will it be christened as the worst tech IPO debut of the 00’s? We will just have to wait and see.