question archive Facebook held its initial public offering (IPO) on May 18, 2012
Facebook held its initial public offering (IPO) on May 18, 2012
Subject:FinancePrice:3.86 Bought11
Facebook held its initial public offering (IPO) on May 18, 2012. This was seen as one of the biggest IPOs in technology and Internet history, with a peak market capitalization of over $104 billion. However, the stock fell as soon as it opened, and the share prices crashed more than 50% over the next couple of months. It took more than a year for the shares to trade above the $38 listing price, as there was concern earlier in 2013 that the company wouldn't make as much money from mobile ad revenue as it could from online ads. Although the company raised $16 billion in the offering, the IPO was considered a dud and the stock lost about $50 billion in value by August 2012. The share price was originally set conservatively, between $28 and $35 a share. But three days before the market debut, the underwriting banks Morgan Stanley, JP Morgan, and Goldman Sachs increased the IPO range to between $35 and $38, citing heavy demand. This change was despite consensus among some large investors that Facebook was overpriced and that the IPO was "overhyped." Prior to the offering, Facebook also expanded its number of shares by 25%, to 421.2 million. But usually, retail or individual investors are allocated up to 20% of the total shares in an IPO. This was considered a bad move when the shares were overvalued, and it led to forced selling from investors who were allotted more shares than they expected and when quick profits failed to materialize a couple of days after the IPO. On the day of the trading, the stock opening was delayed due to technical glitches, as NASDAQ's electronic trading platform was unable to handle the high volume of trades. This also prevented some investors from selling the stock during the first day of trading while the stock price was falling—forcing them to incur bigger losses when their trades finally went through. Recently, a federal judge rejected Nasdaq's bid to dismiss lawsuits by investors who sued the exchange operator for allegedly botching Facebook's debut. On the day of the trading, the stock didn't pop as anticipated, and Morgan Stanley had to step in to stabilize the stock price. It closed the first day of trading at $38.23. In the days and weeks following the IPO, without the price support of Morgan Stanley, FB continued to drop. By the beginning of September, FB had fallen over 50% and closed for trading at $17.73. i. What went wrong with the Facebook IPO? ii. Why did Facebook's share price fall after its initial public offering?
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QUESTION 1
- Too many - In part, say stock market experts, the fault was because Facebook had too many shares to sell. This was supposed to be the hottest IPO in a generation, frustration was mounting as investors worldwide clamored for shares
- Too much - Investors who were expecting to get less than they asked for suddenly found they had got more than they bargained for. Effectively they became forced sellers
- Too rich - Sentiment also ran against the sale after it was revealed that Facebook's early backers were increasing the size of their selloffs. Typically the percentage of insider sales is under 10%.
- Too late - the company warned it does "wouldn't make as much money from mobile ad revenue as it could from online ads" The number of users was rising faster than its revenues, said the company. If Facebook had been a public company, that news would probably have sent its shares falling.
- Technical glitches at NASDAQ - On the day of the trading NASDAQ's electronic trading platform was unable to handle the high volume of trades which also prevented some investors from selling the stock during the first day of trading while the stock price was falling—forcing them to incur bigger losses when their trades finally went through.
QUESTION 2
The share price was originally set conservatively, between $28 and $35 a share. But three days before the market debut, the underwriting banks Morgan Stanley, JP Morgan, and Goldman Sachs increased the IPO range to between $35 and $38, citing heavy demand. This change was despite consensus among some large investors that Facebook was overpriced and that the IPO was "overhyped."
Further prior to the offering, Facebook also expanded its number of shares by 25%, to 421.2 million. But usually, retail or individual investors are allocated up to 20% of the total shares in an IPO. This was considered a bad move when the shares were overvalued, and it led to forced selling from investors who were allotted more shares than they expected and when quick profits failed to materialize a couple of days after the IPO.
