Facebook IPO: Overhyped or oversold?

Facebook IPO: Overhyped or oversold?

Summary: What went wrong with the Facebook IPO? This timeline tries to put things into some sort of order from initial excitement and hype to burst bubble and technology failure.

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TOPICS: Start-Ups
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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.

Credit: Christine Westerback

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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Topic: Start-Ups

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27 comments
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  • Over hyped. But then again, they were forced into it by SEC regulations

    so who's fault is this really? it's not like they wanted to go public, but investment firms took advantage of what they could, given the IPO was going to happen whether FB liked it or not.
    William Farrel
    • And the regulations are designed to protect the insiders

      bankers, politicians, and the well-connected businessmen are all insiders who rig the game in their favor. If they lose money, then they sue. It's all part of the game.

      You are not permitted insider knowledge, but the elite is, and they expect to profit at every turn.
      otaddy
      • Bag holders have themselves to blame

        Why did they jump onto it w/o proper research on FB's business viability.
        LBiege
      • True

        @LBiege

        Just like the good ol' 1990's many people think they are smart and buy into the hype--Facebook has to go up, it just has to.

        But it's still a rigged game. Insiders get to make the big money and everyone else fights for the scraps...and pays a big fee to play the game too.
        otaddy
  • Problem

    The problem with valuations after the IPO are two-fold, a) the company already had about $11 billion in assets and funds which can't be discounted in their valuation and b) the company raised $16 billion, so it's not as if that money just disappeared into the ether.

    Pre-IPO, you could make a valuation purely based on the P/E with some fudging, post-IPO, you have to consider the cash they raised as well (that doesn't decrease if the stock price goes down).
    Jeff Kibuule
  • Go fail somewhere else

    I'm trying to figure out whether someone's agenda is being helped by this incessant bleating in the media about the Facebook IPO being some sort of disaster, or whether it's just ignorant journalists bleating because they see other ignorant journalists bleating.

    Google "Facebook IPO a success" and notice how many authors from the financial and business press think the offering went very well. It's the liberal ideologues posing as reporters -- who view their jobs as fomenting class envy -- who are out spewing this 'failure' stuff.
    Robert Hahn
    • " It's the liberal ideologues posing as reporters --

      ...who are out spewing this 'failure' stuff. "

      Ah...Robert...no...it is the realities of the market place determining Farcebook's IPO failure.

      FB closed today (29 May) @ USD28.84...and the price is DECLINING in after market trading.
      IT_Fella
      • Low standard for failure

        The price has declined? SO WHAT? That is not "failure." That is reality in our Universe, where uncertain values sometimes go up, sometimes go down, and human beings do not know the future in advance. Stocks in companies have been going up and down for hundreds of years. If anyone is surprised by this now, or believes "journalists" when they act as if stocks should never go down, it's because they just fell off a turnip truck.
        Robert Hahn
      • This is not unique to Facebook

        but the price was always going to go down. The initial game is so obviously rigged that it really is a wonder how many silly people are so eager to part with their money, almost to the point of fanaticism. Reality: insiders already control a fixed amount of shares and they win big. Retain majority control of your company AND people chuck flippin huge wadges of cash at you, with no promise of anything in return. Shortly after flotation, the stock will rise in price due to the mass hysteria and then it will fall and fall and fall again. Then you have to play the long game and hope to get your money back. The still-owners don't care - it was win-win for them all the way. I am still young, I'm not even interested in share dealing and I have seen this repeated so many times. Governments sell/float public owned assets such as roads, electricity and telecoms back to the public (????) and companies looking to raise masses of cash in return for no tangible asset list themselves at questionable value, take the money and from there its 'who cares'?
        12312332123
  • How about.....

    ...overhyped AND oversold?
    Userama
  • IPO did not make any sense

    The whole idea of IPO is to raise money for business. In FB case IPO was just a way for early investors to get paid. At this time FB IPO just looks like a giant ponzi scheme. Early investors were paid. All is good.
    paul2011
    • The IPO was done becasue they hit an investment point that

      forced them to go public, due to SEC regulations. They couldn't legaly stay a privately held company any longer once that point was hit.
      William Farrel
      • which begs the question

        why are there so many lemmings willing to part with their cash - if it wasn't even a real 'corporate plan'?
        12312332123
  • Who wants...

    to invest in a company being run by an a$$clown who openly ripped off his partners?
    timspublic1@...
  • Hit another new LOW today...

    USD28.65. Down ANOTHER 10% today. Nice investment.

    Bet those folks who got in @ USD45 are real happy about now.
    IT_Fella
  • SELL YOUR FACEBOOK SHARES NOW !!!!

    Facebook shares will be at $10 within 30-60 days max. Facebook holds no value what so ever.

    Sell your shres or lose it fast.

    Facebook is nothing but a fad and a bubble that will pop very soon.
    EuroCarDriver
  • Anyone keeping

    Anyone still holding on to their shares are just dillusional... yes you lost by now if you bought high .. but it's now at bit over half worth return or let it drop further and loose another 30% of your margins..
    DJK2
  • No real value in facebook.

    Facebook has no real intrinsic value. Their whole business model is based on advertising and selling your private information to advertisers. I really don't see how this model can be worth anywhere in the range of billions. The ones who made money and cashed out early are the lucky winners.
    kraterz
  • Facebook... fundamentals flawed

    I predict that Facebook will increase advertising to increase revenue... and this will annoy customers.

    In the meantime other competitors will launch similar products and everyone will leave to go where the grass is greener.

    I think google is the natural competitor... but really it could be anyone.

    Facebook still looks a lot like a site that many people could duplicate fairly easily... and hopefully better.

    Usability is poor on Facebook for many features... and all your data is too accessible to many companies. The whole interface is either hard or impossible to customise... especially as it pertains to privacy.

    I think it will bomb... but it might take a while... and the share price might recover in the meantime (depends what happens elsewhere like a GFC?).

    http://www.bloomberg.com/news/2012-05-30/facebook-contracts-top-365-000-in-fastest-start-for-ipo.html

    I'm always surprised companies like Yahoo are criticised so hard in the market. Yahoo has been around a long time... and staying power is gold on the internet. Also they have tons of users. That's also gold. All the need is to adjust their model a bit. They seem to be averse to money and lack business sense.

    Suggested I'd like to pay to remove the advertising on an egroup and to free up usage restrictions a while ago and they said they weren't interested. Funny kind of company which passes up non-advertising dollars... when advertising dollars are a more limited commodity.
    MC1@...
  • Overhyped <=========> Oversold

    Uh, excuse me Eileen Brown, "Social Business Consultant," but overhyped and oversold occur at opposite ends of the market reaction spectrum. Perhaps you need to look up the meaning of "oversold." Once you've done that, you might agree that, despite having lost tens of billions in market value, Facebook is still a long way from being oversold!

    I apologize for being caustic, but examples of unqualified "journalism" are everywhere you look today. There truly are no qualifications for being an expert on the web these days, and ZDNet is no exception.
    realenigma