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Facebook debacle chills IPO market

by Tom Park  |  Published May 22, 2012 at 7:53 AM
After a rocky first day of trading Friday and a weekend of negative headlines, investors dumped Facebook Inc. shares Monday, May 21, driving the stock's price down sharply.

Shares of the Menlo Park, Calif.-based company, which debuted Friday at $38 apiece, closed Monday at $34.03, an 11% decrease.

As it did on Friday, Facebook's poor performance Monday dragged down other social media stocks, including Zynga Inc., which slid by as much as 11% early Monday, but recovered to close down 1%. The social network game developer, which relies on Facebook for a majority of its revenue and whose shares already took heavy collateral damage from Facebook on Friday, underwent its own initial public offering in December at $10 per share. Shares of China-based social networking platform Renren Inc. slid 3.85%, to close at $4.74 each.

But the negative effect of the Facebook IPO could spread more widely, observers worried. Its debut, which for months was expected to stoke the IPO market, ostensibly has done the opposite, although the rocky overall financial markets haven't helped either. Three other companies set to go public last week postponed their offerings, and only two -- computer gaming technology maker Corsair Components Inc. and laser hair removal company Tria Beauty Inc. -- are expected to attempt their IPOs this week.

"This is going to impact other VC firms and their limited partners down the line, and temper the enthusiasm of other companies that were looking to go public," said Mark Heesen, president of the National Venture Capital Association. "They may continue to be more willing to go down the acquisition road."

The lack of a significant first-day increase for the stock -- Facebook shares closed their first day of trading Friday a mere 23 cents higher than the IPO price -- means underwriters priced the offering to wring as much money out of the deal as possible. While some argued that the flat debut represented an accurate IPO price pick by the underwriters, the lack of increase is likely to have stung the many retail investors who bought into the hype.

According to a Wall Street Journal report, online broker TD Ameritrade Inc. said that Facebook share trading accounted for up to 29% of Friday's volume.

Several analysts' price targets supported the notion that a $38 per share IPO price was too high. Morningstar Inc., for example, places a $32 price target on Facebook shares.

"Facebook is building the foundation to revolutionize online advertising. However, lack of near-term visibility and cloudy advertising metrics may temporarily stall revenue and profit growth," Morningstar analyst Rick Summer wrote in a research note Friday.

Others remained optimistic.

"Lots of retail investors expected a quick trade to make some fast money, but great investments are not made in a day; we will see a positive day from Facebook," said Herman Leung, an analyst with Susquehanna Financial Group LLLP who set a $48 one-year price target on Facebook shares. "The ad market is a $500 billion opportunity, the payments market is a $200 billion opportunity, and you are investing in the early stages of a platform that will take advantage of these massive opportunities."

But supporting the notion that the pricing was too high were reports that lead underwriter Morgan Stanley stepped in several times Friday to stop Facebook shares from falling below their $38 IPO price. To do this, Morgan Stanley apparently exercised its overallotment option, which amounted to the standard 15% of the total offering, or about 63 million Facebook shares.

With an overallotment, a lead underwriter can either sell the extra shares if the offering is trading well, or buy them back to boost a flagging first-day performance. Several analysts said they believed Morgan Stanley depleted its overallotment option Friday, leaving the bank unable to further prop up the stock Monday.

The poor initial results from the IPO also could cast a big shadow on the secondary market, where private investors buy shares from company employees and early investors. On private exchange SecondMarket, pre-IPO shares of Facebook were being purchased for upward of $42 apiece before trading was ended April 5 in anticipation of the IPO.

"The Facebook IPO kills a big part of the valuation driver in Silicon Valley," IPO analyst Tom Taulli said. "People who bought into Facebook on the secondary market might as well have waited until it went public, paid six bucks to an online broker, and they'd have done better."

Ironically, Goldman Sachs Group Inc. turned out to be a winner in the offering. The investment bank, which invested in Facebook in 2010, sold about half of its shares in the IPO and reaped $1 billion from the deal, essentially doubling its money. By losing out on leading the underwriters on the Facebook IPO, Goldman inadvertently avoided the questions now facing Morgan Stanley about the firm's judgment in pricing the deal.

"Goldman didn't get the lead, which turned out to be a good thing, and they made a billion bucks on the deal," Taulli said.

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Tags: $32 | $38 | Corsair Components Inc. | Facebook Inc. | Facebook shares | Goldman Sachs Group Inc. | Herman Leung | initial public offering | IPO | lead underwriter | Mark Heesen | Morgan Stanley | Morningstar Inc. | National Venture Capital Association | overallotment | Renren Inc. | Rick Summer | secondary market | Susquehanna Financial Group LLLP | TD Ameritrade Inc. | Tom Taulli | Tria Beauty Inc. | underwriter support | Zynga Inc.

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Tom Park

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