Why did the Facebook IPO Fail?

Categories: Invest, News

The much followed initial public offering (IPO) of Facebook failed to be a runaway opening day success, by the way I warned you to be very cautious about IPOs like this on my February 1 2012 post. The first day of trading Friday May 18th, shares opened up at $42.50 about 11% higher than the initial public offering price of $38, closing today at $31, representing almost a 30% drop in value within a few days. This is a failed IPO, not a good start for this new public company, but one they will recover from.

Why did it fail to meet the wild expectations? Here are a few of my guesses…

  • Technology where the stock was being sold, the National Association of Securities Dealers Automated Quotations or NASDAQ, was unable to handle the demand
  • A few days before the IPO a few large companies announced that they thought the advertising value of Facebook was overrated
  • The expectations were set too high by the media and investment talking heads
  • Too many shares were issued

This IPO is looking to be controversial from the start…

  • Two top regulators said the IPO should be reviewed (source Reuters)
  • Regulators looking into Morgan Stanley’s sharing of analyst’s negative reports with some institutional investors but not others (think retail buyers)
  • There could be lawsuits involving Facebook, NASDAQ and shareholders involving the fumbled IPO, considering the 30 billion dollar loss in shareholder equity
  • Today the Securities and Exchange Commission Chairman said they will examine “issues”

What can we learn from this, so that our personal financial management is wise?

  • Stay away from most IPOs, especially hyped ones
  • Be extra careful about industries that don’t have a proven track record of profitability
  • Media investment people are often wrong, so we should take their advice with many grains of salt

What can Facebook and other new hot up-and-coming social media companies learn from this? Perhaps they are not as smart as it seems they are perceived to be. Be wary of the advice of investment bankers and market makers involved in your IPO and get many second opinions. Maybe do a better job of employing social media to help you assess value, plan and market your IPO.