Mark Zuckerberg, chief executive officer of Facebook Inc., center, Sheryl Sandberg, chief operating officer of Facebook, center left, and Robert Greifeld, chief executive officer of Nasdaq OMX Group Inc., center right, remotely ring the opening bell for trading at the Nasdaq MarketSite from the Facebook campus in Menlo Park, California, U.S., on Friday.
By Len Boselovic Pittsburgh Post-Gazette
With $2.5 billion in value evaporated less than one week after one of the most touted stock sales in Wall Street history, Facebook's botched public offering is rattling investor confidence that's been shaken ever since the failure of large financial institutions four years ago.
Analysts and investors say nearly every aspect of the social media giant's May 18 offering of 421 million shares was mismanaged.
Facebook and Morgan Stanley, its lead investment banker, brought the shares to market just as investor sentiment swung from bullish to bearish. Technical glitches at Nasdaq caused a delay in its first day of trading, leaving some investors uncertain whether they had purchased the shares and, if they had, at what price.
Moreover, as was the case with failed stock offerings of the past, there were warning signs Facebook investors ignored in their desire to get their hands on shares normally reserved for a brokerage firm's elite clientele. Those red flags included the announcement shortly before the sale that Facebook's existing shareholders were willing to part with an additional 83 million shares.
As the stock continued faltering this week, there were reports that prior to the offering, Morgan Stanley failed to adequately disclose that its own analyst had downgraded the Menlo Park., Calif., company because of concerns about its revenue. A lawsuit filed in federal court in New York on Wednesday charges that the troubling news was shared with "certain preferred investors" while no disclosure was made to other investors. Facebook told The Associated Press the lawsuit is without merit.
"If you ever wanted to destroy investor confidence more, this was the way to do it," said Colin Symons of Symons Capital Management in Mt. Lebanon. "It makes it seem like the game is rigged."
Another Pittsburgh investment manager said that while the allegations of selective disclosure are disturbing, they are not surprising. John Frankola of Vista Investment Management said many already think Wall Street is not a level playing field.
The political climate, colored by Wall Street scandals and missteps since the collapse of Lehman Bros., AIG and other financial firms in 2008, makes it inevitable that Facebook's follies will raise the hackles of regulators.
"It does speak to confidence in markets, and from that standpoint it's going to get a lot of scrutiny," Mr. Frankola said.
Facebook investors recovered a portion of their losses Wednesday, when shares closed at $32, up $1. That leaves them priced $6 below the initial public offering price of $38.
"I think this is a real lesson for anybody who believes IPOs are some kind of lottery ticket," said Kim Forrest, an equity analyst with Fort Pitt Capital Group in Green Tree.
She said the willingness of insiders to sell 83 million additional shares sent a message that insiders believed Facebook shares may be worth more today than they will be six or 12 months down the road.
"That should have been a warning right there," she said.
Pittsburgh investment manager Jeff Mindlin agreed, saying the sale was an opportunity to cash in for investors who owned the stock long before Facebook made shares available to the public.
"All the good juice was squeezed before it went public, and it just shows you the disadvantage you have," he said. "It creates so much suspicion, and politicians will respond with more restrictions and more regulations."
The AP reported that Facebook is in talks with the New York Stock Exchange to move its stock from the Nasdaq, according to a person familiar with the matter who spoke on the condition of anonymity. A Nasdaq spokesman declined to comment while NYSE spokesman Rich Adamonis said there have been no discussions with Facebook.
University of Pittsburgh finance professor Jay Sukits said charges that Morgan Stanley withheld its diminished view of Facebook's revenue prospects brings to mind the dot-com bubble of the late 1990s. Back then, investment bankers publicly touted tech stocks to investors while keeping disparaging, more honest assessments of the companies' prospects to themselves.
Mr. Sukits said making sure all investors are given the same information is a legitimate concern.
While acknowledging the political climate since the collapse of markets and the economy in 2008, he said regulators should resist the temptation to over-regulate. Mr. Sukits cited talk in Washington about doing something after JPMorgan Chase lost $2 billion in trading exotic securities.
"I don't know when this became something the government should look at," he said.
Mr. Sukits has his doubts about Facebook's long-term prospects. Like others, he questions whether the social media company will be able to generate enough revenue from the mobile phone users who are becoming a larger part of its audience.
Mr. Symons said his firm does not invest in IPOs "because the odds tend to be against you." He is not likely to purchase Facebook shares even after the company gets a quarter or two under its belt as a public company.
"I don't know whether I should value it at $80 or $20, so I figure it's easiest just to stay away," he said.