Initial public offering of Facebook
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The technology company
The IPO was one of the biggest in technology and Internet history, with a peak market capitalization of over $104 billion.Context
For years, Facebook and Zuckerberg resisted both buyouts and taking the company public. The main reason that the company decided to go public is because it crossed the threshold of 500 shareholders, according to Reuters financial blogger Felix Salmon.[2]
Facebook reportedly turned down a $75 million offer from
Facebook did accept investments from companies, and these investments suggested fluctuating valuations for the firm. In 2007
Zuckerberg wanted to wait to conduct an initial public offering, saying in 2010 that "we are definitely in no rush."[9] But since by 2012 Facebook had more than 500 round lot (over 100 shares) stockholders, Facebook was subject to the SEC disclosure rules starting the next year, 2013. Zuckerberg had little choice as to whether an IPO had to be done at once.
Preparation
Filing and roadshow
Facebook filed for an initial public offering on February 1, 2012 by filing their S1 document with the
To ensure that early investors would retain control of the company, Facebook in 2009 instituted a dual-class stock structure.[9] After the IPO, Zuckerberg was to retain a 22% ownership share in Facebook and was to own 57% of the voting shares.[13] The document also stated that the company was seeking to raise US$5 billion, which would make it one of the largest IPOs in tech history and the biggest in Internet history.[14]
The roadshow faced a "rough start" initially.[15][16] Zuckerberg raised controversy for wearing a hoodie (rather than a customary business suit) to the first meeting with investors.[17] Wedbush Securities analyst Michael Pachter called it a "mark of immaturity."[17] A half-hour-long video played during that meeting also frustrated investors who wanted to discuss more technical details,[16] and was dropped for future meetings.[18]
Valuation
Prior to the official valuation, the target price of the stock steadily increased. In early May, the company was aiming for a valuation somewhere from $28 to $35 per share[19][20] ($77 billion to $96 billion).[21] On May 14, it raised the targets from $34 to $38 per share.[22] Some investors even suggested a $40 valuation, although a dip in the stock market on the day before the IPO ended such speculation.[23]
Strong demand, especially from retail investors, suggested Facebook could choose a relatively high offering price.
On May 16, two days before the IPO, Facebook announced that it would sell 25% more shares than originally planned due to high demand.[25] This meant the stock would debut with 421 million shares.[23]
The Facebook IPO brought inevitable comparisons with other technology company offerings. Some investors expressed keen interest in Facebook because they felt they had missed out on the massive gains Google saw in the wake of its IPO.[23] LinkedIn stock, meanwhile, had doubled on its first day.[23]
At $26.81 per share, which Facebook closed at a week after its IPO, Facebook was valued like "an ultra-growth company," according to Robert Leclerc of the Financial Post. Its
A number of commentators argued retrospectively that Facebook had been heavily overvalued because of an illiquid private market on
Price targets
Prior to the IPO, several investors set price targets for the company. On May 14, before the offering price was announced, Sterne Agee analyst Arvind Bhatia pegged the company at $46 in an interview with
Early investors themselves were said to express similar skepticism. Warning signs before the IPO indicated that several such investors were interested in selling their shares of the company.
Analysis of fundamentals
Striking an optimistic tone,
Some analysts expressed concern over Facebook's revenue model; namely, its advertising practices.[12] Brian Wieser of Pivotal Research Group argued that, "Although Facebook is very promising, it's an unproven ad model."[12] To better monetize user involvement, the company could improve advertising.[12] Yet such efforts could undermine user privacy.[12] Also, some advertisers expressed concern over the value of the advertisements they purchased on Facebook.[12] General Motors announced it would pull its $10 million campaign from the social network just days before the IPO.[23] The automobile company asked for "bigger, flashier" advertisements but Facebook refused.[30]
Public trading
In the immediate build-up to the offering, public interest swelled. Some said it is "as much a cultural phenomenon as it is a business story."[23] Meanwhile, Facebook itself celebrated the occasion with an all-night "hackathon" on the night before the IPO.[31] Zuckerberg rang a bell from Hacker Square on Facebook campus in Menlo Park, California, to announce the offering, as is customary for CEOs on the day their companies go public.[31]
First day
Trading was to begin at 11:00am Eastern Time on Friday, May 18, 2012. However, trading was delayed until 11:30am Eastern Time due to technical problems with the
Initial trading saw the stock shoot up to as much as $45.[32] Yet the early rally was unsustainable. The stock struggled to stay above the IPO price for most of the day, forcing underwriters to buy back shares to support the price.[35] Only the aforementioned technical glitches and underwriter support prevented the stock price from falling below the IPO price on the first day of trading.[36]
At closing bell, shares were valued at $38.23,[37] only $0.23 above the IPO price and down $3.82 from the opening bell value. The opening was widely described by the financial press as a disappointment.[38]
Despite technical problems and a relatively low closing value, the stock set a new record for trading volume of an IPO (460 million shares).
Subsequent days
Facebook's share value fell during nine of the next thirteen trading days, posting gains during just four.
The shares did not get back to the initial $38 again until August the following year, a full 16 months later.[46]
Significant price moves | ||||||
---|---|---|---|---|---|---|
Trading days after IPO |
Date | Share price at market close |
Market capitalization |
Daily change |
Net change from offering price |
Notable event |
Offering price |
May 18, 2012 |
$38.00[41] | ~$90B[47] | N/A | N/A | IPO |
First day |
May 18 | $38.23[41] | ~$90B[47] | 0.6% | 0.6% | |
1 | May 21 | $34.03[41] | 11% | 10% | ||
2 | May 22 | $31.00[41] | 8.9% | 18% | ||
6 | May 29 | $28.84[41] | $69.17B[47] | 9.6% | 24% | |
8 | May 31 | $29.60[41] | 5% | 22% | ||
9 | June 1 | $27.72[41] | 6.4% | 27% | ||
19 | June 15 | $30.01[41] | 6.1% | 21% | ||
68 | August 20 | $20.011[41] | 5.04% | 47% | ||
578 | December 20, 2013 | $55.12[41] | $140B | 0.13% | 45% | Facebook joins S&P 500 index |
642 | February 19, 2014 | $68.06[48] | $173.35B | 1.13% | 79% | WhatsApp Purchase Announcement |
Price targets for the new stock ranged considerably. On June 4, seven of fifteen analysts polled by FactSet Research suggested prices above the stock's price, effectively advising a "buy."
On December 11, 2013,
Aftermath
Financial
The IPO had immediate impacts on the stock market. Other technology companies took hits, while the exchanges as a whole saw dampened prices. Investment firms faced considerable losses due to technical glitches.
The IPO impacted both Facebook investors and the company itself. It was said to provide healthy rewards for venture capitalists who finally saw the fruits of their labor.[12] In contrast, it was said to negatively affect individual investors such as Facebook employees, who saw once-valuable shares become less lucrative.[12] More generally, the disappointing IPO was said to lower interest in the stock by investors.[12] That would make it more difficult for the company to accumulate cash reserves for large future expenditures such as acquisitions.[12] CBS News said "the Facebook brand takes a pretty big hit for this," mostly because of the public interest that had surrounded the offering.[44]
Some suggested implications for companies other than Facebook specifically. The IPO could jeopardize profits for underwriters who face investors skeptical of the technology industry.
While expected to provide significant benefits to Nasdaq, the IPO resulted in a strained relationship between Facebook and the exchange.[54] Facebook has considered moving its listing to a competing exchange.[54]
Legal
This section needs to be updated.(January 2024) |
More than 40 lawsuits were filed regarding the Facebook IPO in the month that followed.[55]
Reuters' Alistair Barr reported that Facebook's lead underwriters, Morgan Stanley (MS), JP Morgan (JPM), and Goldman Sachs (GS) all cut their earnings forecasts for the company in the middle of the IPO roadshow.[56] Some[who?] have filed lawsuits, alleging that an underwriter for Morgan Stanley selectively revealed adjusted earnings estimates to preferred clients. The remaining underwriters (MS, JPM, GS) and Facebook's CEO and board are also facing litigation.[57] It is believed that adjustments to earnings estimates were communicated to the underwriters by a Facebook financial officer, who in turn used the information to cash out on their positions while leaving the general public with overpriced shares.[58]
Additionally, a class-action lawsuit is being prepared[by whom?] due to the trading glitches, which led to botched orders.[59][60] Apparently, the glitches prevented a number of investors from selling the stock during the first day of trading while the stock price was falling - forcing them to incur bigger losses when their trades finally went through.
In June 2012, Facebook asked for all the lawsuits to be consolidated into one, because of overlap in their content.[55]
Morgan Stanley settled allegations of improperly influencing research analysts for $5 million in December 2012.
Regulatory
Facebook's IPO is now under investigation and has been compared to pump and dump schemes.[12][34][56][61] Government officials called for investigations in the following weeks. Securities and Exchange Commission Chairman Mary Schapiro and Financial Industry Regulatory Authority (FINRA) Chairman Rick Ketchum called for a review of the circumstances surrounding the troubled IPO.[61] On 22 May, regulators from Wall Street's Financial Industry Regulatory Authority announced that they had begun to investigate whether banks underwriting Facebook had improperly shared information only with select clients, rather than the general public. Massachusetts Secretary of State William Galvin subpoenaed Morgan Stanley over the same issue.[62] The allegations sparked "fury" among some investors and led to the immediate filing of several lawsuits, one of them a class action suit claiming more than $2.5 billion in losses due to the IPO.[63]
Secondary exchanges
Before the creation of secondary market exchanges like
Reputational
The reputation of both Morgan Stanley, the primary IPO underwriter, and NASDAQ were damaged in the fallout from the botched offering.
In interviews with the media, bankers seemed sanguine about the outcome. "We think Morgan has done pretty well on the deal," one person at a bank that was one of Facebook's other underwriters told CNN Money. "Reputation of the bank aside, Facebook hasn't been a bad trade for Morgan." This is because even as the share prices dropped Morgan "racked up big profits" trading the shares.[64]
Morgan's reputation in technology IPOs was "in trouble" after the Facebook offering. Underwriting equity offerings became an important part of Morgan's business after the financial crisis, generating $1.2 billion in fees since 2010. But by signing off on an offering price that was too high, or attempting to sell too many shares to the market, Morgan compounded problems, senior editor for CNN Money Stephen Gandel writes. According to Brad Hintz, an analyst at Sanford Bernstein, "this is something that other banks will be able to use against them when competing for deals."[65]
Notes
- ^ Facebook, Inc. changed its name to Meta Platforms, Inc. in October 2021.
References
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