4 reasons the Facebook IPO fizzled

For all the hype, most retail investors weren’t buying in, and it took some alleged buying on the part of the underwriters to keep the stock from losing on opening day.

By MSN Money Partner May 21, 2012 11:32AM

By Howard Gold

 

MoneyShow.comFacebook's (FB) much-hyped initial public offering started out with lots of hope, but it ended with a thud. The stock barely closed above the offering price of $38 a share -- and only after the underwriters reportedly bought up enough stock to keep it in the plus column.

 

Why? There were four reasons.

 

1. Facebook was already semi-public
The IPO "pop" had occurred much earlier. When Google (GOOG) went public in 2004, there wasn't a highly developed market for shares of private companies. Now, exchanges like SecondMarket and SharesPost allowed insiders to cash out and institutional investors to buy in before Facebook went public.

 

These markets had driven up Facebook's price 13-fold in four years of private trading, Bloomberg reported, and that took the wind out of the IPO's sails.

 

2. Facebook insiders got greedy
With all the brouhaha about the offering, Facebook could boost the offering price to its peak and sell 25% more shares than were originally planned.

 

The beneficiaries were primarily Facebook employees and venture capitalists and other early investors. The insiders were able to squeeze every last drop of value out of the IPO, and investors who bought on Friday were left with a dried-out lemon.

 

3. General Motors spoiled the party
The automaker couldn't have picked a worse time to announce that it wasn't going to continue advertising on Facebook -- timing so bad they might as well have been short Facebook stock. (Just kidding, folks, because it didn't happen.)

 

By publicly turning its back on Facebook just days before the offering, GM (GM) exposed Facebook's biggest vulnerability: It doesn't have a killer revenue source like Google did in paid search, but instead has an "evolving" business model. Translation: We still don't know how we're going to make enough money to justify our stock price.

 

4. Individual investors didn't bite
Despite lots of media hype, retail investors took a "been there, done that" attitude, and reportedly didn't buy in heavily. An Associated Press-CNBC poll showed two-thirds of active retail investors thought the IPO would be overvalued when it went public, and many of those surveyed said Facebook was a fad. So, they sat on their hands.

 

And who can blame them? Investors learned some hard lessons from the dot.com bust, housing crash, and financial crisis, and one of them was that corporate insiders, investors, and big Wall Street banks don't run offerings so John and Jane Q. Public can get rich. They're entirely for the benefit of the investors and executives.

 

The Facebook IPO succeeded admirably at that, but not at much else. That's why it turned out to be, by its own lofty standards, a dud.

 

Also read Howard’s take on how Uncle Sam and Governor Jerry hope to reap a tax windfall from Facebook’s stock on The Independent Agenda.

 

More from MoneyShow.com

 

DATA PROVIDERS

Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.

ABOUT TECHBIZ

Start investing in technology companies with help from financial writers and experts who know the industry best. Learn what to look for in a technology company to make the right investment decisions.

VIDEO ON MSN MONEY

RECENT QUOTES

WATCHLIST

Symbol
Last
Change
Shares
Quotes delayed at least 15 min

MSN MONEY'S