Facebook Inc. (FB)’s initial public offering, which set a record for technology companies by raising more than $16 billion, also has the distinction of producing the worst return among the largest U.S. deals of the past decade.
The CHART OF THE DAY compares the first five days of trading for the 10 largest U.S. IPOs from the past 10 years. Shares of Menlo Park, California-based Facebook have fallen 13 percent since underwriters sold them for $38 on May 17. The decline exceeds the 10 percent drop by MF Global Holdings Inc. in its first five days. Visa Inc. (V) did best among the biggest deals, rising 45 percent.
Facebook’s Mark Zuckerberg has sold 30.2 million shares and director Peter Thiel has sold 16.8 million shares of the social-networking company.
Facebook Inc. Chief Executive Mark Zuckerberg has sold 30.2 million shares and director Peter Thiel has sold 16.8 million shares of the social-networking company, according to securities filings published late Tuesday.
The company is being sued under the claim that it misled investors:
Facebook stock has been on the market for less than a week and the company is already facing a lawsuit.
Three investors are suing Facebook and its initial public offering underwriters for allegedly hiding unfavorable growth forecasts before the company’s $16 billion IPO last Friday, according to Reuters.
Investors Dennis Palkon and Brian Roffe bought 1,800 and 200 Facebook shares, respectively, at the IPO price, and Jacob Salzmann paid more than $123,000 on Friday for 2,961 shares at an average $41.77 each.
They allege that Facebook told their underwriters to reduce their 2012 performance estimates because more users are using the mobile apps, which do not generate advertising revenue, and left some investors out of the loop while sharing the data with preferred investors. The investors say they received a “false and misleading” registration statement and prospectus, according to ABC.
Law firm Robbins Geller Rudman & Dowd filed the class-action suit Wednesday in a federal court in Manhattan. The suit is against against chief underwriter Morgan Stanley, as well as Facebook’s board, which includes CEO Mark Zuckerberg and CFO David Ebersman, according to ABC. Reuters says Goldman Sachs Group is another defendant.
Due to the controversy, the stock offering will be reviewed by a Senate panel:
Lawmakers are concerned about reports that banks underwriting the deal may have lowered growth forecasts on Facebook’s revenue and only told some large investors — and not retail investors — in a way that violates securities law. In addition, they want a better explanation about technical glitches that botched the first day of trading.
“I have instructed my staff to conduct due diligence regarding issues raised in the news about Facebook’s IPO,” said Sen. Tim Johnson (D-S.D.), chairman of the Senate Banking Committee, noting his staff is now coordinating “bipartisan staff briefings with Facebook, regulators and other stakeholders.” Johnson said he would wait for more information before making a decision on a hearing.
Could Facebook really destroy the US economy?
Behavioral economics is the new “psychology of denial.” Yes, it’s like falling in love. You can’t hear, can’t see the warning signs. Till after. After months of hype building up to this IPO, you’re convinced Facebook is your soul mate, that not getting shares in that IPO would leave you devastated, rejected by your true love. And nothing anyone says about the risks will change your mind. That’s the “psychology of denial.”
There are four main reasons for this pervasive psychology of denial among Main Street’s 95 million investors: First, investors hate admitting we’re irrational and ill-informed, so they cling to the fiction they’re rational. Second, optimism is the investor’s worst nightmare, but Americans still act optimistic no matter the odds. Third, Wall Street loves investors who are irrational, uninformed and optimistic; they’re easy to manipulate. Fourth, American investors are by nature trusting folks who want to believe Wall Street’s telling the truth, even though most of the time that’s not the case.
The Facebook mystique is so powerful today that in our minds Facebook truly is too big to fail. Facebook will never fail. Facebook will just keep growing indefinitely at rates that would remind us of the old dot-com mindset of 1999. Hail, Facebook — you are too big to fail, and nothing will change our minds.
And, paradoxically, that’s exactly why Facebook is the ultimate economy killer.
Facebook Bankers Secretly Cut Forecasts For Company In Middle Of IPO Roadshow:
This by itself is highly unusual (I’ve never seen it during 20 years in and around the tech IPO business.)
But, just as important, news of the estimate cut was passed on only to a handful of big investor clients, not everyone else who was considering an investment in Facebook.
This is a huge problem, for one big reason:
Earnings forecasts are material information, especially when they are prepared by analysts who have had privileged access to company management. As lead underwriters on the IPO, these analysts would have had much better information about the company than anyone else. So the fact that these analysts suddenly all cut their earnings forecasts at the same time, during the roadshow, and then this information was not passed on to the broader public, is a huge problem.
Any investor considering an investment in Facebook would consider an estimate cut from the underwriters’ analysts “material information.”