Four Reasons the Facebook IPO Fizzled

Facebook’s 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, so the IPO “pop” had taken place much earlier.  When Google 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 was able to get a peak offering price 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 hollowed-out lemon.

Facebook offices in Palo Alto, California in 2007. Photo: Flickr./pshab.

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 by publicly dissing Facebook just days ahead of the offering, 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 money.

4. Individual investors didn’t bite.  Despite lots of hype in the media, 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.

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4 Responses to Four Reasons the Facebook IPO Fizzled

  1. Cat May 22, 2012 at 1:31 am #

    You need a “like” button. (Just kidding.) Now that we (the public) have gotten wise to who really gets rich in the stock market, where are we to invest our hard-earned dollars so we don’t get screwed by the corporate insiders, investors and big Wall Street banks?

    • HowardRGold May 22, 2012 at 6:58 pm #

      Hi, Cat:
      I think the best way for the public to invest is a diversified (domestic and international stocks, bonds, cash, some REITs, some gold) portfolio of low-cost index funds and ETFs. No individual stocks and no fad stocks like Facebook. Vanguard, Schwab and Fidelity will all help develop comprehensive financial plans. They\’re not perfect, but they\’re good enough and won\’t rip you off. Good luck!

  2. Cat May 25, 2012 at 2:58 am #

    I am tempted to sell everything and put the money under my mattress, but I won't. Thanks for your response.

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