Facebook Initial Offering Debacle Could Further Erode Economy

If it sounds like a scam and smells like a scam, it is probably a scam.

Zuckerberg and Thiel sold off millions of shares


Investors don’t seem to have taken note of the dot-com bubble that bursted just a few years ago and decided to trust Facebook’s growing popularity to put their money on the blue tech giant. Despite the warnings issued by investment experts about unwarranted tech companies whose real value is not reflected by how many people are willing to give the NSA their personal information in exchange for trendiness, greedy small, mid-size and large investors decided to put up with another scam that was announced well ahead of its time.

Facebook’s initial public offering in itself was a very risky bet for people who dared to make a quick buck out of the company’s growing acceptance around the world. However, there are those who would jump from a tall building without a parachute if such an act comes wrapped around with the words cool, promising, trendy, nice, future and so on. After only three days of trading, Facebook stock dropped 18 percent; a number that could have been larger if its underwriters hadn’t intervened to keep the adventurous offering afloat.

Although the fictitious stock gained big time early in the trading, its value dropped like a hammer hitting levels inferior to the opening price of $38. For most mid and low level investors this is already a disaster, but the situation could get even worse for those who decide to keep cool until the price stabilizes to its actual value. Current analysis of the future of the stock suggests that the price is likely to plummet to as little as $10 per share. That is right. The public hype together with the massive cultural phenomenon that Facebook turned into since its creation does not determine the actual value of its stock. According to an analysis conducted by Thomson Reuters’ StarMine, the correct price should be around $9.59 per share. Most investors must be asking themselves where was this analysis a week ago?

According to Reuters, multiple price analysis suggest that earnings projections for the company will reach an amount that reflects the growth of the technology sector in general. Facebook’s future shows gains of about 10.8 percent, whereas the price at which its stock was offered shows an inflation in value of about 24 percent. Would the abrupt fall in value be a temporary occurrence perhaps? Not likely. Especially now that some of the procedures to offer, sell and trade Facebook’s stock are under questioning and the practices may go under careful review by authorities.

A number of issues popped out since Facebook began offering stock to investors; among them, Morgan Stanley’s cut in its revenue forecasts, Facebook’s stock sell off, the loss of 18 percent in its value, a lawsuit filed by an investor after he smelled a rat, reviews begun by financial regulators and so on. All in all, Facebook’s IPO operation turned one of the fastest transfers of money in the near past; about $40 billion. “Facebook right now is going for far more than what it’s worth, it’s like buying $1 for $1.98, it just doesn’t make sense at this price,” said Eddy Elfenbein, editor at Crossing Wall Street. “Just from basic modeling the stock should be around $17 to $20 dollars, and that is with a lot of variables.”

According to CNBC, the Financial Industry Regulatory Authority is now reviewing allegations suggesting that Morgan Stanley shared information with insiders right before the IPO began. That information, the allegations say, was negative news. The complaints prompted Massachusetts Secretary of Commonwealth, William Galvin to issue a subpoena to Morgan Stanley over the discussions the company had with investors regarding Facebook’s stock offering. After changes were made to Facebook’s S-1 filings, the revised report was then sent to Morgan Stanley’s investors before making it available to the press.

The lawsuit mentioned above was filed by a Maryland resident who sued the Nasdaq OMX Group. Phillip Goldberg says in his class-action lawsuit that the company was negligent when handling Facebook’s IPO, which in turn caused losses to investors like himself. In the documents he says that delays in the purchases caused the loss of his money. The mishandling, he says, occurred on May 18, the day Facebook began selling stock. More investors decided to sell their freshly acquired stocks after a supposed glitch prevented Nasdaq from completing numerous orders from people who wanted a piece of Facebook’s fortune. “The whole FB story is a fiasco,” said Jon Najarian, from TradeMonster.com. “The Nasdaq has blood on its hands from the locked markets they disseminated for over 2 hours.”

But the situation with Facebook’s failed attempt to sell its nonexistent value is not rooted on glitches or misunderstandings, but on the well-known impossibility of selling a product at such an unreasonable value. Those who sought to make a quick dollar have paid the price for their greed. However, it is unlikely that big investors lost money in this new chapter of financial insanity. But retail investors who did not have inside information on Facebook’s real value continued begging for shares. This fact makes anyone question whether the work of banks such as Morgan Stanley went beyond being a traditional underwriter. The same question could be asked about other Facebook underwriters such as Goldman Sachs. How much did they hype the value of the stock? How did they do it? There are other caveats to the Facebook debacle, for example whether there were any bets against the stock and how much money was made in those bets? It wouldn’t be the first time.

But perhaps more sickening is the fact that since Facebook’s initial stock offering, both Mark Zuckerberg and one of the company’s directors, Peter Thiel have sold millions of shares to collect their piece of the pie. Not even the heads of the company gave the stock a chance. As reported by Market Watch, “Chief Executive Mark Zuckerberg has sold 30.2 million shares and director Peter Thiel has sold 16.8 million shares of the social-networking company. This information was confirmed by securities filings published late on Tuesday. The gross amount collected by Zuckerberg adds up to $1.13 billion, while Thiel made $633 million.

In the meantime, neither Facebook not Morgan Stanley are willing to talk about the scandal known as Facebook’s initial public offering. But some analysts and financial writers are willing to adventure dire predictions given Facebook’s debacle. Paul B. Farrell from Market Watch believes that Facebook could destroy the little that is left of the economy. Farrell has put the social networking company in his top 12 as a candidate to sink the economy into a deeper crisis. “What’s going on? Facebook’s in trouble, that’s what. Now in the cross hairs of public scrutiny, everybody’s taking potshots. And the warnings are just beginning,” said Farrel in an article published on Market Watch.

Facebook’s Overvalued Stock Fiasco Uncovered

Although the slide on Facebook’s stock price was officially explained as a ‘glitch’, reality demonstrates that the company’s artificially high-valued position was due to the intervention of its underwriters.

BLOOMBERG | MAY 22, 2012

Criticism of the Facebook Inc. FB -10.99% stock deal grew as the shares dropped below their offering price in their first full day of trading Monday, wiping $11.5 billion off the social network’s market value.

The company, its investment bankers and the Nasdaq Stock Market came under fire for failing to ensure a smooth debut for one of the most anticipated deals in recent memory. Facebook shares, which opened Friday at $38 and managed to add just 23 cents during the day, fell 11% Monday to $34.03.

While investors agreed Facebook shares weren’t worth $38 apiece, they couldn’t find consensus on who deserved the most blame.

Monday’s selloff was attributed partly to investors who were allotted more Facebook shares than they expected and moved to pare their holdings, said people familiar with the matter. Retail investors usually are allocated up to 20% of the total shares allotted in an IPO, but in Facebook’s case, retail allocation was around 25%, the people said.

Facebook had increased the number of shares being offered at the last minute before the IPO. As a result, many retail investors weren’t hungry for more shares once trading began, according to the people.

Facebook’s offering, one of the biggest U.S. IPOs, was supposed to burnish the reputations of Morgan Stanley, MS -1.20% the deal’s lead banker, as an underwriter, and Nasdaq OMX Group Inc. NDAQ +3.59% as the listing exchange of choice for hot technology companies. But some investors said tactical missteps and technical problems left them uneasy about the deal even before trading began Friday morning.

They faulted Morgan Stanley for overloading the market with too many Facebook shares and took aim at Nasdaq for system glitches that prevented some investors from confirming their trades or trade cancellations, which some said cost them tens of thousands of dollars.

“The underwriters completely screwed this up,” said Michael Pachter, an analyst at Wedbush Securities. The offering “should have been half as big as it was, and it would have closed at $45.”

At $34, Facebook would have a price-to-earnings ratio, a measure of how expensive or cheap a stock is, of about 57 times projected earnings for the next 12 months, according to FactSet research. The ratio means a Facebook share is more than four times expensive as a share of Google Inc. GOOG +2.28%

“Facebook’s IPO priced at a level well-above where we foresaw compelling 12-month returns,” BTIG analyst Richard Greenfield said in a research note Monday. With revenue and earnings growth decelerating in 2012, “we find Facebook’s current valuation unappealing.”

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