BW Communities

More Whimper Than Bang

BW Online Bureau Nov 08, 2014

<?xml version="1.0" encoding="UTF-8"?><root available-locales="en_US," default-locale="en_US"><static-content language-id="en_US"><![CDATA[The Facebook IPO has taken place and Facebook shares are now available for all and sundry – worth at the end of their second day of trading $31 per share, a far cry from the $38 per share offering price last week. On Wednesday, Chief Executive Mark Zuckerberg, and several banks led by Morgan Stanley were sued by shareholders, who claimed the defendants hid the social networking leader's weakened growth forecasts ahead of its $16 billion initial public offering (<a href="http://www.businessworld.in/businessworld/businessworld/content/Facebook-Earnings-Revisions-What-Numbers-Tell.html">Read: What The Numbers Tell</a>). The defendants were accused of concealing from investors during the IPO marketing process "a severe and pronounced reduction" in Facebook revenue growth forecasts, resulting from increased use of its app or website through mobile devices. The lawsuit was filed in the US. District Court in Manhattan, according to a lawyer for the plaintiff. Earlier, a Los Angeles law firm filed a lawsuit seeking class action status against Facebook and its underwriters alleging inadequate disclosure of key information. As more details about Facebook's IPO emerged, investors have been finger-pointing, complaining and speculating about what's next for the company, Morgan Stanley and the Nasdaq, which had trouble executing trades on the day of Facebook began trading publicly. In fact, on online forums were full of discussions about potential class-action lawsuits for investors who lost money because their buy, sell or cancellation orders were mishandled.  Four of Facebook's major underwriters -- Morgan Stanley, Goldman Sachs, JPMorgan and Bank of America -- reduced their financial estimates for the soon-to-be-public company following the release of a revised prospectus on May 9 that noted the negative impact of mobile users on Facebook's business. Investors expressed disappointment, skepticism and even shock on Tuesday after learning that an analyst at lead underwriter Morgan Stanley cut his Facebook revenue forecasts in the days before the company's initial public offering - information that apparently did not reach small investors before the stock went public and subsequently tumbled. Two top US financial regulators said on Tuesday the issues around the initial public offering of Facebook should be reviewed, putting fresh pressure on the company, its lead  underwriter, Morgan Stanley, and the Nasdaq stock exchange. Facebook shares closed 8.9 per cent lower at $31, following an 11 per cent plunge on Monday. At that price the company has shed more than $19 billion in market capitalization from its $38-per-share offering price last week. Facebook actually left very little for the common investor. The non-executive shareholders (mostly hedge funds) bought restricted Facebook stock in the pre-IPO market. Unfortunately that stock was only available for a few "sophisticated" investors: under SEC rules, only sophisticated investors (read: already wealthy) can purchase restricted stock<a href="http://www.businessworld.in/businessworld/businessworld/content/Facebook-Wants-Make-Offer-You-Can-Refuse.html"> (Read: Facebook Wants To Make An Offer You Can Refuse</a>) Also the investment banks — in this case Morgan Stanley, JP Morgan and Goldman Sachs —  If they follow the usual practice of charging 7 per cent of the IPO proceeds as a commission will get a $350 million prize for perhaps one year of work. The underwriters have also reserved the possibility of an "over allotment option." This means that, if there are too many people willing to buy a ticket to the party, they will just print out more tickets (and get the 7 per cent commission of course). The typical over allotment option gives the underwriter the possibility to increase the number of shares by 15 per cent (that is, $52.5 million in additional compensation to the banks).   Facebook's guidance to analysts, and the subsequent revised estimates communicated to some investors, were delivered in telephone calls and conference calls rather than emails or written reports, the sources said. The conversations took place shortly after Facebook filed its revised prospectus. The legal subtleties, though, did little to ease the anger of some investors and brokers who say the Facebook IPO now stands as an ugly example of a system rigged against the little guy. Still Overvalued? With the stock falling on Tuesday, a debate continued over what the social networking company is really worth. Even with the company valued at about $85 billion at the market close Tuesday, compared with $104 billion at its IPO price, some experts say it is overvalued. Thomson Reuters Starmine conservatively estimates a 10.8 per cent annual growth rate - almost exactly the mean for the technology sector. On that basis, Starmine says the stock could be valued at $9.59 a share, a 72 percent discount to its IPO price. Similarly, the company's price-to-earnings ratio remains lofty, even after the selloff. The $31 price implies a P/E of 60 for expected 2012 results, compared with Google's 13.3 for a similar rate of growth. With Facebook shares not yet available for borrowing and thus all but impossible to sell short, bearish investors have sought out almost any related vehicle to bet against Facebook. Over the past three trading days, prices plunged on two closed-end funds that owned pre-IPO shares. Firsthand Technology Value Fund and GSV Capital Corp both dropped more than 25 per cent even though their Facebook holdings make up only a small fraction of assets. "Until investors can actually short Facebook, they have to keep shorting other things that can give them some sort of proxy for Facebook," said Thomas Vandeventer, manager of the Tocqueville Opportunity Fund, which owns shares of both the battered closed-end funds. Brokers who over-ordered shares in the expectation that supply would be limited continued to complain they received too much stock to handle and were left in the dark about forecast changes. Some big investors, though, protected themselves well. In a securities filing on Tuesday, Microsoft disclosed that it had sold 6.5 million shares at $37.58, meaning the software giant covered the cost of its original investment of 32.8 million shares for just $240 million in 2007, while still retaining most of the stake. Future Of Facebook Will Facebook be the next Apple, Google, or Microsoft – that companies which have in some way or other driven how we experience the Web today? Is Facebook going to drive our Web experience forward in the way that those three have?  Also the question that everyone has is whether "some other social network" will come along and take away Facebook's unique selling proposition. Google is certainly trying its best with its Google+ network, but there's little sign that people are engaged with it. The toughest challenge is of course the shift to mobile. Born in 2004, Facebook predates the mobile Internet, which took off in 2007. That means it remains a tough challenge and Facebook has to make a huge shift to fit into the four-inch screeen but there is no reason the Facebook cannot take it on.