Thursday, May 31, 2012

Facebook's Failed IPO: Who's to Blame

Facebook's Failed IPO
Facebook's IPO is a failure. Yes, it still trades for over thirty dollars, but it's drop in value was nothing short of disastrous. In such cases, most want an easy scapegoat. Though there are many that want to blame the company's awkward founder and CEO, he really does seem to be one of the few that can walk away mostly blameless. Instead, there is a cast of characters that share an equal amount of blame in the failure of the IPO.
A good deal of the blame for Facebook's failed IPO needs to sit on the shoulders of the banks. At a typical IPO offering, most banks will tend to ask for more shares than they actually expect to receive. Many banks will only receive about half as many shares as they might ask for. In this case, banks got exactly what they requested, and the glut of shares was not helpful for any bank hoping to get trading done in an orderly manner. This helped the buying and selling of the shares to falter, and this likely helped lead to the poor opening-week showing of the stock.
Part of the failure of Facebook's IPO has to fall on the shoulders of Morgan Stanley. The investing giant is rumored to have purchased far fewer shares of the stock than one would have initially assumed, thus both leaving too many shares on the market and failing to help drive up the price. There are rumors that the company had at least some advanced knowledge that the company's performance was not quite up to par, and any truth to that statement would put Morgan Stanley in a perfect position to want to see the stock falter. At the very least, the failure of the giant to buy shares did not help the initial performance.
Facebook itself is also to blame for its own failure. The company's growth is not nearly up to par for its stock price, and the lower revenue stream necessarily diminished the value of the stock. Facebook might be a household name, but most of the money that passes through the social network - including paying to get more Facebook fans - never actually touches the company's coffers. Many have said that the initial stock offering was unreasonably high, and that it was at least overvalued by ten percent. In fact, many experts have even claimed that Facebook's real value should have been in the penny range. Unfortunately, the high offering was just too high to be sustained.
There is, of course, also the matter of investors. Many investors jumped onto the stock in hopes of gaining access to a sense of prestige. Getting in on the ground floor of Facebook, at least to these investors, was like getting in on the ground floor of Apple or Microsoft. Unfortunately, too few of these investors remembered that for every Apple that there are ten The tech bubble should have encouraged a wait-and-see attitude from investors, but it simply seems that the big name attached to a high-valued initial offering caused some investors to set aside common sense. This will, unfortunately, only lead to things getting better before they get worse.
As you might be able to tell, there is a great deal of blame to be passed around. Banks asked for too much stock, Morgan Stanley stayed away, and investors flocked to a company that is underperforming. This created a perfect storm for a failed IPO, and the results should not have been surprising. From this point, one should simply wait and see how low the stock will go before reaching a natural level.

No comments: