Facebook IPO: Fooled You!
Karen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Movie buffs everywhere will immediately recognize that immortal line spoken by Dark Helmet in Spaceballs. From this morning’s news articles uncovering more irregularities with the Facebook (NASDAQ: FB) IPO to the falling stock price, this initial offering had the look and feel reminiscent of the old dot.com smoke and mirrors show.
The first clue of potential problems came from the unending media hype surrounding this IPO. It had all the trimmings of a side show carnival rather than Wall Street high finance, and the Street itself seemed to act as the barker. “Come one, come all! Hurry, hurry, hurry and step right up to take advantage of this once in a lifetime opportunity!” Investors believed it and fell all over themselves trying to get as much of the Facebook pie as they could. The stock price was raised from the initial range of $28 - $35 a share to $34 - $38. The initial offering was quickly oversubscribed and Facebook filed the appropriate documents with the SEC to issue an additional 50 million shares. Many Wall Street analysis announced they expected the stock would quickly jump from $38 to $44 a share, perhaps even by the close of the first trading day.
Next were the problems stemming from the nature of the company. Facebook is a social media network, the electronic version of a coffee klatch. It doesn’t produce goods to sell or provide services that generate income. Facebook’s revenue comes strictly from click advertising, and that is clearly not enough to generate the returns investors will demand from the company. Facebook has yet to provide a clear and concise profitability road map that addresses these concerns.
Lastly is the skullduggery that continues to be exposed. I watched with interest as each time Facebook’s stock price was in danger of falling through the initial $38 opening price, a wave of fresh buying swept the price right back up. I found out later the answer to this pricing behavior. Lead underwriter Morgan Stanley (NYSE: MS) was propping up the stock price. The unspoken question: Why did they do it?
And this morning Morgan Stanley is again under fire, this time from the Financial Industry Regulatory Association, the SEC, and William Galun, the top securities regulator for the State of Massachusetts. These inquiring agencies want to know if Morgan Stanley informed only specific clients that some analysts had cut Facebook’s revenue estimates shortly before the stock started trading. This private information would have allowed this select group the opportunity to cash in their shares and take profit before the stock price fell.
Not to be outdone by regulatory agencies, this past Wednesday saw Facebook shareholders file a lawsuit in U.S. District Court in Manhatten against the company, CEO Mark Zuckerberg, Morgan Stanley and other banks, citing the concealment of the growth reduction analysis as the primary reason. On Tuesday, a similar lawsuit was filed in California for the same reason.
There’s an old adage that states if something looks too good to be true, it probably isn’t. Investors who believed the Wall Street analysts and media reports and bought ten thousand shares at the opening price of $38, are looking at, with the stock trading around $32 this morning, a $60,000 loss.
Fooled you!
Fool blogger Karen Rogers does not own shares in any of the companies mentioned in this entry. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
