Facebook IPO - From Overhype to Overkill

John T. Mathew June 15, 2012

Even as Greece registered its anger against austerity measures and France voted out Sarkozy in favour of a Socialist candidate, Facebook held a ray of hope for the battered markets of the United States.

Image Credit ValueWalk


In a scene from Jules Verne’s classic novel “Around the World in Eighty days”, the protagonist Phileas Fogg “is converted into stock”, so that people could make money through buying and selling those shares. Quite a novel way to “go public”, as the process of listing your company on the stock exchange is called.

After the crisis of 2008, many companies in the United States decided against trying their luck on the stock market—some withdrew their initial public offerings (IPO), often blaming “market conditions”.

In mid-2010, the trend saw a reversal, as the stock market’s relative stability lulled investors into a sense of security. Many high-profile companies listed themselves on the two prominent stock exchanges in the United States—the New York Stock Exchange and the Nasdaq— in the year, with technology companies ruling the roost.

Groupon Inc, a website which offers daily deals to users, saw a strong opening in November 2011, with shares rising more than 56 percent on its first day of trading on the Nasdaq. Groupon, which was founded in 2008, was not a profitable company when it went public. Yet, the company’s boom on its market debut gave hope to the IPO market, which had again fallen into a slump by then.

Encouraged by Groupon’s success, many companies followed suit, but the one company investors were waiting for was Facebook—the social networking site started by a college boy named Mark Zuckerberg , who became a billionaire after the site’s unprecedented success.

From February, when the company filed for an IPO with the U.S. Securities and Exchange Commission (the equivalent of India’s SEBI), till May, when the company’s shares began trading, the financial world in the United States has talked of little else. Even as Greece registered its anger against austerity measures and France voted out Sarkozy in favour of a Socialist candidate, Facebook held a ray of hope for the battered markets of the United States—after all, if the boy wonder chose to let his company enter the market at a time when many companies were postponing or withdrawing their offerings, he was probably right.

And for a few months, the world of finance capital found comfort in the thought of the social media behemoth that would single-handedly prop up ailing markets, dispensing textbook remedies to under confident investors. Even as dictators were toppled and people took to the streets, the Facebook IPO was going to prove that “our” way was the best.

In the run-up to its market debut, Facebook could have postponed its coming-out party as markets began to rumble after the elections in Greece and France. It chose not to—understandable. In the merciless world of capitalism, any sign of weakness is an opportunity for the wolves to pounce. Facebook would forever be “the company that filed for a whopping $5 billion IPO but then chickened out and postponed”. No, appearances are important in this world. The company even raised the number of shares it planned to offer and the expected price range, adding to the sense of excitement that was already making Wall Street lightheaded.

On May 18, the company’s shares began trading after a delay, and shares rose only about 13 percent, and closed almost flat to the offer price of $38 per share.

Not only did the much-awaited company’s shares not soar above the roof, as investors and Wall Street hoped, the exchange it chose to trade on, Nasdaq, (the choice had led to many an analyst calculating what profits the exchange would make, and how its competitor, the NYSE, had lost out on the biggest deal of the century) experienced technical problems during the historic debut, leading to erroneous trades. Investors and market makers—people who facilitate trade for brokers—are facing losses to the tune of millions from a single day of trading.

Facebook-stock-IPO-crash Until the next big blunder, Facebook will occupy headlines as the company that had everyone drooling but still managed to mess everything up on its debut.
Image Credit: Alexander Higgins Blog

Until the next big blunder, Facebook will occupy headlines as the company that had everyone drooling but still managed to mess everything up on its debut. The company which raised about $16 billion in one of the biggest public offerings (you can find a list of the biggest IPOs in the U.S. here, in pictures), saw its stock price plummet in the days following its market entry, has been slapped with investor lawsuits and is feeling regulatory heat over why its debut was botched up.

Facebook’s story so far is an example of how Wall Street often twists its own rules around to serve its own ends. The company rakes in huge profits, but its long-term revenue growth model has been questioned sharply, and after the event, questions have been raised over how the company could be valued so highly.

The biggest bankers in Wall Street have been throwing themselves over each other to be associated with the prestigious deal from the time the idea of taking his company public was just a twinkle in Zuckerberg’s eye. There were reports that the money-hungry, unwilling-to-give-in-by-an-inch greedy bankers we saw in movies like ‘Wall Street’ were willing to accept a huge cut in their fees, just to have their names up in black and white on Facebook’s IPO prospectus. As for the honour of having your name among the lead underwriters (the investment bankers who raise money from investors in an IPO), the big ones nearly swooned at the thought. Morgan Stanley beat everyone to the lead underwriter post finally, and some banker somewhere may have contemplated tightening his tie around his throat after the biggest deal he snared for his company blew up in everyone’s face.

In the days from the IPO, the company’s long-term revenue model has been taken apart and put together again. Its prospects of raising money from advertisements (especially from mobiles) look quite bleak at this point. In other news, Zuckerberg has been dropped from a few lists of billionaires after he lost some money when the company’s shares went spiraling downwards.

The social media network has also been sued by investors who claim it disclosed some information to big banks and certain privileged investors, information that less worthy mortals were not privy to. Sounds familiar? It has a whiff of the big deals on Wall Street where people who get inside information make a killing, while regular investors are left the remains of the feast.

For readers interested in knowing more, John Cassidy, in a New Yorker blog talks about how the company’s founders and the people in the inner ring made their money before its shares started trading. Another interesting article by James Surowiecki in the financial page of the same magazine explains how Facebook has divided its shares into 2 classes (yes, a class divide, if you will), which ensures that “Zuckerberg’s shares have far more voting power than the ones sold to outside shareholders”—this means that the boy wonder will control a majority of the voting shares, effectively leading to him having the final word.

This unequal division is after the company raised billions of dollars with investors’ money. Facebook is not the first company to do so. Since Google went public in 2004, a number of big companies have adopted the same structure. Hence, there is no real democracy in such a ‘public’ company. The powers still lie with the people who have clout.

From the article:

Public companies aren’t going to disappear, but we are witnessing a significant shift in power from shareholders to entrepreneurs and managers, one that may make the stock market less central to American capitalism. Facebook’s I.P.O. was the biggest tech I.P.O. the U.S. has ever seen. It also seems likely to be the biggest it will ever see.

Since Facebook’s disastrous debut, no company has made its trading debut in the U.S. markets till the time of writing this article. Very few companies have filed for an IPO, and even auto racing company Formula One has delayed its IPO on concerns over weak markets.

Finance capital’s yearning for IPOs and the high it gives to markets has been subdued, at least for now. But the Facebook IPO and subsequent events have been crucial in reminding those who seem to have forgotten, of the excesses of capitalism, and how its inherent nature is that of favouring the strong over the weak.

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