May 21, 2012
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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