By Matt Gallagher, Red Herring
Following Facebook’s IPO on May 18, the largest tech IPO in history, the company’s stock price had slipped almost 25 percent from its initial offering of $38. Shares in Facebook closed at $28.84 in today’s trading.
While the IPO’s opening price was ideal for Facebook and its initial investors as it left no excess money on the table, buyers of the stock expecting a pop in valuation on the first day were burned and left holding the bag. Plus, technical glitches on the Nasdaq exchange left investors in the dark for as long as six hours wondering if their trades had been executed, resulting in millions of dollars in losses for investors across the board.
As the IPO opened at $38 a share on the first day of trading, lead underwriter Morgan Stanley was forced to prop up the stock price to keep it from embarrassingly sliding below its initial pricing. Morgan Stanley had to dip into an emergency reserve of 63 million Facebook shares, worth more than $2.3 billion at the going rate, to keep the price afloat, according to Bloomberg.
Facebook is so far the only tech IPO to not experience a pop in trade price on its first day. Pandora, LinkedIn and Groupon each saw significant price increases on their first day of IPO.
Technical glitches on the Nasdaq stock exchange likely resulted in more than $100 million in losses in claims by four of Wall St.’s main market makers, including Knight Capital, Citadel Securities, UBS AG and Citi’s Automated Trading Desk, according to Reuters. A glitch caused the trade to begin half an hour late, and left thousands of buyers in the dark about whether or not their claims had actually been executed, with some not knowing the outcome as late as Monday.
Nearly a week after the deal, many investors are still discovering that their trades were not executed at the prices expected.
Both Knight and Citadel are each claiming losses of $30 to 35 million that could overwhelm a $13 million fund the firm established to handle potential claims.
Nasdaq held a call with investors last Thursday where they announced adjustments to thousands of trades to ensure no limit orders would be filed above $43 per share, a person familiar with the matter told Reuters.
Nasdaq hopes to earmark $13 million to resolve bad trades, a figure not likely to cover the total damage, the Wall St. Journal reported.
Maryland investor Phillip Goldberg has sued Nasdaq for negligence over its handling of the IPO that left investors in the dark. He indicated there are thousands of investors in the class he seeks to represent in the suit, and is seeking unspecified damages.
Additionally, a Morgan Stanley analyst advised several clients orally that Facebook’s profits would be lower than expected. The law firm Robbins Geller Rudman & Dowd has announced a class action lawsuit against Facebook and underwriter Morgan Stanley, alleging that facebook hid a “severe and pronounced reduction” in revenue forecasts from investors. A Facebook executive told underwriting banks to cut estimates based on reduced profit margins caused by an increase of mobile users. Yet the executive did not share the same info with smaller investors, a “secretive disclosure” that is, at best, grossly unfair to smaller investors, and at worse, violates securities laws, Business Insider reported.
The handling of the IPO is being investigated by the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, Massachusetts Secretary of the Commonwealth William Galvin and the U.S. Senate Banking Committee.
After all the hoopla, however, Facebook pulled off its IPO to the best of its interests and that of its venture investors. The lack of an increase from an initial price indicates that the stock was priced very efficiently, leaving no money on the table that would dilute its value for founders, employees or venture partners. In the end, the company raised $16 billion in the largest tech IPO in history.
Facebook indicated from the beginning that its mission wasn’t to be a public company but to “make the world more open and connected,” as CEO Mark Zuckerberg stated in a speech as he ceremoniously rang the bell from Facebook’s Palo Alto office to open Nasdaq on the day of its IPO. The company successfully squeezed every penny it could from the IPO, making the most money it could for its employees, investors and social mission.
And investors, in theory, invested in the longevity of the company, not a quick bubble to pop a buck. The Facebook story will naturally continue after its IPO. Only time will tell what the value of the company will turn out to be. The company recently crossed the 900 million user threshold. In an age where sharing and data is king, Facebook still holds the mother load, a valuable asset that goes beyond the stock market.