Facebook has come a long way, from a fun project started by Mark Zuckerberg and his friends in a Harvard dorm to a publicly listed company. This student start-up has seen a lot of highs, a few lows and a lot of criticism especially about its privacy policies, censorship and new features. Currently, the company finds itself in tough times as it battles to retain users in developed countries, expand to new markets and find ways to increase its advertising revenue.What was expected to be the biggest tech IPO has turned out to be a disaster for Facebook as well as the banks which were the IPO’s underwriters. Earlier this year in May, Facebook debuted on Nasdaq with Mark Zuckerberg ringing the opening bell. The initial share prices of $38 gave the company a valuation of a massive $104 billion. As of now, Facebook has lost almost half of its value with the stock trading at $20.38 and a valuation of about $56 billion. So what went wrong with the Facebook IPO? Let’s take a closer look.
The Valuation
Facebook had been stalling its IPO for quite some time and it was expected that it would enter the market well prepared, along with its lead investment bank Morgan Stanley. Originally the stock price was supposed to be in a bracket of $28-35 but, right before the IPO, the company aggressively upped the price to $38 breaching a valuation of $100Bn.Facebook’s valuation was almost 100 times its last year profits, much higher than the tech giants Google and Apple that have higher revenues as well as profits.
Insider Trading
Even before the IPO hedge funds like Felix Investments had taken large shares in Facebook through insider trading on secondary markets. As the IPO came closer a lot of early backers of Facebook started increasing the size of their stakes for sale. Peter Thiel, investor and Facebook board member, increasing his selloff before the IPO from 7.7 million to 16.8 million shares didn’t help the sentiments surrounding the IPO as well. Infact about 57% of the shares sold came from Facebook insiders while typically this number is under 10 percent.
Timing and Execution
Just days before the IPO, General Motors made an announcement to cut its $10 Million Facebook advertising campaign terming it to be ineffective. This coupled with Facebook’s revision to its IPO prospectus which cautioned investors about its lack of monetization strategy for mobile dampened the enthusiasm in the investors. In response, a rather unusual move, all three banks handling the IPO (Morgan Stanley, JP Morgan and Goldman Sachs), reduced Facebook’s revenue forecast which further hurt the company in the IPO.
The number of shares was increased by 25% just prior to the IPO, which was already overvalued. This turned the investors who got more shares than they wanted into forced sellers when they couldn’t make much profits a few days after the IPO. Technical difficulties in Nasdaq, on the day of the IPO, which delayed trading by half an hour added to the woes of Facebook as well.
Recent tech IPO’s have spelled disaster for companies like Groupon and Zynga with both companies losing about 70% of their valuation and Facebook seems to be headed on the same road as of now. Meanwhile, LinkedIn remains the best example of a sustainable and profitable IPO which doubled their valuation within 24 hours and has sustained it ever since.
What do you think lies ahead for Facebook? What should Facebook do in order to revive itself? Do post in your comments.
