TORONTO – There are suggestions that the process that preceded Facebook’s foray into life as a publicy-traded company may not have gone as smoothly as it could have.
In the days leading up to the Initial Public Offering (IPO), General Motors announced that it was pulling its ads from the site because they weren’t doing anything for the company. Those ads were worth $10 million a year to Facebook.
There were the technical difficulties that delayed the start of trading by half an hour. Once the stock started trading, it briefly surged, before closing the day at pennies above the IPO price. And then the bottom fell out.
Facebook has lost about 20 per cent of its value since going public. Actually, investors have lost 20 per cent of what they put into the company; more if they bought when the stock was trading above $40.
The company raised about $18 billion in cash by going public, bringing the value of the company to about $104 billion. When the stock was offered – and snapped up – at $38, the owners of the company raked in that money, minus an estimated $175 million in IPO fees the underwriting banks collected for selling the deal to investors.
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The Wall Street Journal is reporting that those big banks also made $100 million in profits shorting the Facebook IPO. “Shorting” is stock talk for betting that the price of a stock will fall.
Regulators are now investigating whether Morgan Stanley may have selectively released negative information about Facebook to some institutional investors while not making the information available to retail investors. The information was a cut in the company’s expected earnings because more users were going mobile and Facebook was facing challenges figuring out how to make a profit from that.
Lawsuits have already been filed naming Facebook founder Mark Zuckerberg, Morgan Stanley and NASDAQ as defendants.
Investors are angry. Twitter’s on fire with the venting, but not all of it is aimed at Facebook.
“People bringing lawsuits because they didn’t make money on the Facebook IPO are even more irritating than people on Facebook,” Dave Pell tweeted.
“This Memorial Day, let’s remember all the fallen Facebook stock,” Claudia Dikinis suggested.
“Wow, this Facebook IPO is kind of a cluster*ck isn’t it?” Roger Erik Tinch posted.
Buying shares in a company on the first day they’re available to the public entails a lot of risk. Tech firms, especially, can face unique problems.
When Facebook first announced last November that an IPO was imminent, we asked Dave Valliere, Associate Professor at the Ted Rogers School of Management at Ryerson University in Toronto, what problems Facebook could be up against once it went public and was expected to generate returns for investors.
“The things that drive up expectations about their ability to generate future cash flows are themselves so short-lived: fundamental technology innovations, consumers that get bored with the next big thing, rapidly changing competitive landscape, etc. Same things threaten Facebook. Look at how LinkedIn is already trying to steal their most profitable users. And Google+ is still just starting to roll out. The value of Facebook really depends on how much faith you have in their ability to deal with uncertainties like these and to innovate in ways to generate future cash.”
We’ll find out more about Facebook’s prospects for making investors happy when the company releases quarterly results for the first time as a publicly-traded company on July 23. If markets like what they hear and the stock price surges, investors might let memories of this month’s rocky debut fall off their timeline.
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