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Facebook IPO increasingly losing face

The largest technology company IPO ever, involving the first company in the US to go public at a valuation over US$100 billion, has been coined an embarrassment.

The losers are Facebook as the issuer, Morgan Stanley the lead underwriter, Nasdaq, the exchange Facebook chose to list on, market makers such as Knight Capital and Citadel, and the retail investors who were seduced to participate as Facebook allocated the largest-ever retail investment portion on record for an IPO.

The winners are the company founders, who became billionaires overnight, the venture capitalists who were early investors in the company and company employees who were rewarded with stock. So what are some the main reasons the most hyped IPO in a decade went wrong?

Greed probably ranks the highest on a long list. The issue price of the shares was originally in the region of $28 to $35 with 337.4 million shares to be offered, a market capitalization of around $93 billion if priced at the high end.

Just days before the IPO, Facebook persuaded the underwriters to not only increase the issue price range to $35 to $38 but also include a greenshoe of an additional 50.6 million shares for a total issuance of 388 million shares.

With the final issue price of $38 the company was valued at approximated $104 billion.

With 2011 revenues of $3.7 billion and a net profit of $1 billion, the company was selling at over 28 times revenue and a P/E of 105. Technology industry peers such as Google and Apple trade at P/Es of 18 and 13 respectively.

But declining quarter-on-quarter revenues and the information provided to the underwriters by Facebook, caused Morgan Stanley, Goldman Sachs, and JP Morgan to cut their revenue forecasts shortly before the IPO. There are a growing number of investor class action suits claiming that these main underwriters selectively told some investors but not all.

In addition to the lawsuits, the US House and Senate committees that oversee the financial sector and main US regulators SEC and FINRA are planning to investigate this and other issues surrounding the IPO

Nasdaq’s dismal performance caused further damage. At the onset Facebook’s public debut was delayed 30 minutes. It appears the IPO software was not designed to handle the enormous volume of this particular IPO. A flood of cancellations combined with software flaws lead to an imbalance of buys and sells, sending the program into a loop.

It is believed 30 million shares were mishandled leading to incomplete, unfilled, and incorrectly filled orders.

While the exchange has a fund of $13 million to deal with claims, the estimated damage is $150 million, market makers Knight and Citadel are each claiming losses of $30 million to $35 million alone.

With current market conditions and Nasdaq’s botched performance, the gates are likely closed at least temporarily for future tech IPOs. The shares now hover around $27 at a valuation of $74 billion, a drop of 28 per cent.

The combination of negative disclosures, a botched IPO, and concerns that the hype is fading, may lead to further declines.

Anthony Galliano is chief executive of Cambodian Investment Management.
anthonygalliano@covenantim.com

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