May 31, 2012
Let’s be blunt – the Facebook (FB) IPO wasn’t just egg on the face of the company, its underwriters and the Nasdaq Stock Market; it was an omelet of record-breaking proportions. But while Morgan Stanley (MS) and the exchange face lawsuits from irate investors and individuals who had to wait hours to be told they owned Facebook shares and that they had bought it at prices that may not be seen again for months, at least, these folks aren’t the only losers. In fact, throughout the entire IPO process, it’s hard to find any winners.
As with any market shakeup or crisis, the ripples from Facebook’s bungled IPO stretch far and wide. Here is a quick snapshot of some of the less self-evident losers from this particular fiasco.
Wall Street Trading Firms
One after another, these folks are filing claims with Nasdaq OMX Group (NDAQ) for trading losses incurred as a result of the mayhem surrounding the first day of trading in Facebook shares. Nasdaq previously said it hopes to keep payouts under $13 million, but Knight Capital Group (NITE) alone has claimed it lost $30 million and Tom Joyce, the company’s CEO, estimated early on that total losses may top $100 million. The Financial Industry Regulatory Authority likely will oversee the arbitration process with Knight, Fidelity Securities ($30 to $35 million), E-Trade Financial, UBS ($30 million), Citigroup ($20 million) and Citadel Securities ($30 million plus) and others. Even if many of those claims prove ill founded, the payout is almost certain to be closer to $100 million than $13 million. True, it’s likely that nobody is crying for Wall Street traders, but at a time when investment banks are battling to boost profitability, any dent in profits is likely to cost some folks their jobs as a new wave of cost-cutting begins – and odds are it won’t be the jobs of those involved in the Facebook IPO that vanish.
Early investors in Facebook like venture firm Accel Partners have already made a lot of money by backing Mark Zuckerberg’s brainchild. And many of them have already lightened up their holdings of Facebook stock, selling into the IPO or unloading shares privately in the months before the offering was announced. That’s lucky, because although the lockup prohibiting them from selling into the market will expire in part as early as August, the odds are that they won’t be able to capture anything close to the IPO price.
It’s clear that aftermarket demand for Facebook stock is anemic at best, and in the absence of a blowout second-quarter earnings announcement, there’s no sign of any news that will displace the big black mark that the IPO left on the stock’s reputation among investors. That in turn means that any insider selling on the expiry of the lockups in August and toward Thanksgiving may well be met with more waves of selling. If they do sell, those insiders will still make bucketloads of money – but not nearly as much as they and their own investors had counted on. It’s a bit like picking five of the six numbers in the lottery correctly, and then missing the sixth one by only a single digit.
It was nice while it lasted…. The game developer behind Farmville relies on Facebook for 92 percent of its revenue, as it just revealed in its quarterly filing with the SEC. The company went public last year at $10, and rapidly saw its stock price sink below that IPO price. For a brief moment in time, it seemed as if the Facebook buzz might provide a jolt of energy to the beleaguered Zynga (ZNGA) shares, as they surged 10 percent in the days leading up the Facebook IPO to trade as high as $8.88. Flash forward two weeks, and they’re back down, languishing at a mere $5.87 as of Wednesday’s close.
The snapback to reality from pre-IPO hype was even more brutal for Zynga than for Facebook itself. After all, Facebook users don’t have to pay to play games – they can use the site for myriad other purposes. Unsurprisingly, Mark Pincus, the CEO of Zynga, told a California technology conference Wednesday that he’s actively exploring alternatives to Facebook, ranging from its own platform to mobile software platforms based on Google’s (GOOG) Android and other operating systems. For now, however, the company’s fate – and its stock price – seem inextricably linked to Facebook, which is anything but a comfortable position right now.
The IPO Market
Facebook was supposed to have coattails, wasn’t it? Certainly, the buzz among investment bankers in the run-up to the IPO was that the deal would be a slam-dunk success, help investors put to one side their anxiety about the storm clouds circling in Europe and focus instead on the upside potential for high-growth startups. Whoops. Instead, Kayak Software Corp. is reported to have decided to delay its own IPO, postponing a roadshow that should have started last week; similarly, Russia’s largest social networking company, VKontakte, put a hold on its own IPO after Facebook’s face plant dampened investor enthusiasm for the sector as a whole. And Graff Diamonds was set to go public in Hong Kong but pulled the offering just a day before it was supposed to price.
Given that investors now appear to be firmly back in the “risk off” camp, with macroeconomic anxieties preoccupying them, it may take those deals months to get back on track. Certainly, it’s unlikely that they’ll be ready to try again until after the market has digested whatever happens during June’s elections in Greece.
Given that Facebook’s founder showed up to roadshow events wearing a hoodie, it’s unlikely that he cares much about losing a billion dollars or more from his net worth, but since his company went public, Zuckerberg has fallen off the list of the world’s 40 wealthiest people. As of yesterday, his net worth (based on the value of his stake in Facebook) had fallen to around $14 billion from $19.1 billion on the day of the IPO. That’s still enough to ensure that he, his new wife and their pooch, Beast, will live in comfort for the rest of their days, and enough to ensure he’ll be wooed for philanthropic donations from pretty much every group worldwide. And it’s also safe to say that, basking in newlywed bliss, he probably isn’t brooding too much about those stray billions just yet. But it will serve as a sharp reminder that Facebook now has a lot to prove to its new shareholders, and it’s up to Zuckerberg to find a way to deliver the outsize growth implied in the premium IPO price.
Admittedly, few of those who have suffered from the Facebook fiasco are those that we should stay up late at nights worrying about. Even the individual investors who raced to buy Facebook stock in hopes of flipping it at a profit within a few hours – while they may get our compassion for losses they can’t really afford – probably are paying the price for succumbing to the temptation to gamble on what they believed, falsely, to be a sure thing. As for the other businesses and the Facebook insiders – well, this is the kinda stuff they warn you about in business classes. Collateral damage of any kind is never pretty, but in this case, at least, it’s easy to understand what happened and why – and to learn from the debacle.