Facebook IPO: Overhyped or oversold?

It is almost two weeks since Facebook held its IPO. Its share price has been in turmoil over the last 10 days. What went wrong with the IPO?  This timeline of events tries to put things into some sort of order from initial excitement to burst bubble.

November 28th 2011: News broke that Facebook was in discussions with the Securities and Exchange Commission about an IPO. Speculation began about how much it would manage to raise after flotation.

Initial reports placed Facebook's value at $100 billion after IPO and that it would raise about $10 billion for the company. The size of these figures for a company that essentially deals in electronic relationships started the hype.

December 9th 2011: The push to IPO began. Mark Zuckerberg started the publicity blitz -- timing was everything in the rush to IPO. Facebook seemed to be everywhere.

Zuckerberg gave interviews on US and foreign TV channels to talk about how well the business was doing, and to try and convince new investors to consider coming on board. Over 1,000 staff at Facebook were expected to become millionaires. They planned to retire, travel to space or go on to build their own start-ups.

Sean Parker was interviewed and reckoned that there was a bubble in 'the largest offering in history':

"I actually believe that to the extent that there’s any bubble in technology at all it’s really a bubble around Facebook in the sense that there’s a huge amount of pent up demand amongst retail investors for access to Facebook equity"

February 1st 2012: Facebook filed its IPO and speculation began about how much Facebook was actually worth. Initial guesses were that the social network was worth $82 billion. The IPO valued the company at $5 billion.

13th March 2012: Just 5 weeks later Facebook's implied pre IPO valuation was set at $102.8 billion. Facebook also planned to halt trading of its shares on secondary markets in April in order to end any price fluctuations.

9th May 2012: Facebook amended its IPO, warning users about its doubts about monetising its mobile platform. Facebook does not make money from its mobile platform and highlighted the risks:

We had 488 million MAUs who used Facebook mobile products in March 2012.

While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile usage of Facebook.

We have historically not shown ads to users accessing Facebook through mobile apps or our mobile website. In March 2012, we began to include sponsored stories in users’ mobile News Feeds.

However, we do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven.

We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered.

If users increasingly access Facebook mobile products as a substitute for access through personal computers, and if we are unable to successfully implement monetization strategies for our mobile users, or if we incur excessive expenses in this effort, our financial performance and ability to grow revenue would be negatively affected.

10th May 2012: A source from Reuters claimed that Facebook's IPO was oversubscribed, followed by a report from Bloomberg that the demand was weaker than expected.

13th May 2012: Facebook was under pressure to become the social CRM giant and move its business model to mobile. Its IPO was two orders of magnitude greater than previous social media offerings.

14th May 2012: Rumours started to circulate that Facebook would increase its offering range from $28-35 per share to $35-$40 per share changing its initial projection from high end to low end. 16th May 2012: Facebook increased its IPO by 25%. It amended its offering from 157,415,352 shares from selling stockholders to 241,233,615 shares -- a 25% raise in the number of shares offered. It also highlighted that there were many risk factors that would prevent Facebook from growing as a business.

17th May 2012: It was reported that Mark Zuckerberg would exercise options to buy 120 million shares at 6 cents per share, then claim tax breaks on the difference. At IPO, the shares were offered for $38 per share which equated to a $3 billion tax break.

Facebook was valued at of $104 billion and estimated to raise almost $16.01billion when it went public. However, Facebook's filing with the SEC showed dependence on multiple factors including advertising, government regulations and its personnel.

Each of these factors could contribute to the company underperforming. With Zuckerberg still in charge as CEO controlling majority of the stock, doubts started to surface about the amount of control he would still have after flotation. Would you be an idiot to buy shares in Facebook?

May 18th 2012-- IPO Day: The company's 33 underwriters worked to prop up the shares by buying massive blocks of stock even though the actual IPO had the highest volume of any IPO in history with 460 million shares traded.

But was the Facebook IPO intended as an exit strategy, a money grab, a social bubble ready to burst soon? Or is it a last ditch attempt to breathe life into a failing concern? And on IPO day Facebook was hit by a $15 billion class action user tracking lawsuit.  Surely this was perfectly timed to put investors off buying stock?

24th May 2012: Secondary markets might have been to blame for the IPO failure as shares were trading privately in the weeks before the offering at $42 per share. Did secondary markets set the IPO price too high?

25th May 2012: The initial IPO price was set by Wall Street bankers and clients. Retail investors stayed away. Investors and insiders already had shares – others stayed away as they disagreed with the valuation. Did the 'smart money' get burnt?

Mark Hulbert reckoned that Facebook stock is only worth $13.80.  That is quite a slide from the heady days of pre-IPO hysteria.

When the Facebook circus actually came to town did it live up to the pre-IPO hype and hysteria?  The technical glitch at NASDAQ lost UBS and Citi approximately $50 million after trading was delayed by 30 minutes. Was this technology failure, at a critical point for Facebook an omen about its future financial situation?

Perhaps smaller investors squeezed by the current economic conditions acted with caution and stayed away from the latest 'get rich quick' Internet scheme.

When an offer seems too good to be true -- it usually is.

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