Who is at fault for the Facebook IPO debacle?

It was supposed to be the greatest initial public offering (IPO) since Google, however it ended up being a nightmare for investors. Facebook became a media frenzy for it's highly anticipated IPO that came out on May 18th, people all over the news and on the street talked about it. After the dust settled the stock only managed to eke out a 23 cent gain, the only reason it did not finish below the IPO price of $38 was because the lead underwriter Morgan Stanley supported the stock price during the trading day. A couple of days later this so called great IPO is trading below $32 about 16% below the initial offering price. So why and how did this happen to such a promising internet company as well known as Facebook?

The first problem for Facebook is the value, the IPO gave this company a value of $104 billion. If you look at Facebook's first quarter earnings they had $1 billion in revenue and income of $205 million which was a 12% drop for the company. Compare this to Cisco Systems with a $90 billion market capitalization and $11.25 billion in revenue along with $1.8 billion in profit per quarter. These are very different business segments however they do show how overvalued the company is. The lead underwriter in this IPO was Morgan Stanley and they ultimately set the price for the issue based on fundamentals and demand. Morgan Stanley had to drop their fees and be aggressive on the pricing in order to get the business and bring to market this enormous IPO.

It has been reported that Morgan Stanley also cut their earnings and revenue estimates for the company in the days leading up to the IPO. There was only one problem they told certain institutional clients however it was not mentioned to everyone. This information is material and should have been communicated better to the investment community. The blame for excessive valuation goes to Morgan Stanley for misreading the demand for the issue and setting the price to high in terms of valuation.

The founder of Facebook, Mark Zuckerberg has about $19 billion worth of Facebook stock based on the IPO price of $38. Despite owning around 20 percent of the stock he maintains voting control of about 55% due to a dual class share structure. This may throw out some red flags for investors because Mr. Zuckerberg can have his way for everything because of his voting control in the company. This might be ok if you have total confidence in the guy running the company, however investors seem a bit cool to Mr. Zuckerberg's leadership. He was a no show during the second IPO roadshow in Boston and no explanation was given for his absence. If you are selling $20 billion of stock to the public you might want to show some interest and be there to answer to potential shareholders. So Mr. Zuckerberg gets a failing grade for his aloofness during the road show when you are supposed to be promoting your company.

Those who bought into the media hype and the Facebook frenzy would have purchased shares no matter what you told them about the stock. I work as a broker and some clients were selling out all of their positions so they could put it all on Facebook. Despite all the red flags and warning signs they had to get their hands on these shares and if they did not get in on the IPO price they were placing orders at the beginning of the day. Unfortunately for anyone who bought this stock at the when it started trading on the secondary market on May 18th they have all lost money. What seemed like a great investment at the time has turned into a gamble and a tough lesson learned in the world of investing.

Despite the Facebook IPO debacle there remains some hope for the company. It was a successful IPO for the company itself raising $19 billion in cash to help them grow, they have 900 million users and counting. Investors may yet reap the rewards down the road if Facebook can monetize their user base and maintain their dominance in the social networking space. One needs to know that this will be a long difficult road ahead, however Facebook I'm sure has some tricks up there sleeve and may wow the investment community in the future. As for myself I will remain a casual Facebook user and avoid the stock until I see more clarity in terms of earnings and strategy.