Facebook's Faceplant: Social Networking IPO Falls Short of the Hype

I was watching CNN yesterday during all the coverage. The caption headlines were cracking me up. "Facebook faceplant" is putting it mildly. I can't remember a more disastrous public stock debut. I was picking up my son from Disneyland last night and on the way home I mentioned to him that Facebook's IPO flopped. He says, "Dad, would you speak English I don't know what you're talking about." I told him that the initial stock offering was hyped all out of proportion, that this was a major fail for Facebook. And my son responds, "Facebook ruins your life. I hate Facebook," or something like that. He recently temporarily deleted his account ("suspend" is one of the options if you hit the delete button). My son was getting burned by all these fake "friends" he has --- people who were making dates and appointments and plans and not following through. I think high school was like that without Facebook, if I recall. But you go through your teen your with the technology you have.

In any case, I personally don't love Facebook that much. (Twitter is so much better it's ridiculous.) I mostly just spam my posts up there and get a few hits out of it. I have connected with some great old friends, although that mostly shows me that my life's moved on from my own high school days.

The Wall Street Journal has the big report, "Facebook's IPO Sputters: Underwriters Forced to Prop Up IPO of Social Network; Only a 23-Cent Rise" (via Techmeme):

Facebook Inc. took eight years to stage one of the most anticipated initial public offerings ever. The anticlimax came Friday, as Wall Street bankers struggled to prevent the newly minted stock from ending its first day with a loss.

The stock had been widely predicted to soar on its first day. Instead, up until the closing moments of the trading session, Facebook's underwriters battled to keep the stock from slipping below its offering price of $38 a share. Such a stumble would have been a significant embarrassment, particularly for a prominent new issue like Facebook, the most heavily traded IPO of all time.

In the end, the bankers succeeded. When trading on Nasdaq ended at 4 p.m., the social network's stock was up just a hair, 0.6%, at $38.23.

The roller-coaster day—Facebook's shares started out jumping roughly 11%, before cooling off—was also beset by trading glitches and a 30-minute delay in the opening of trading. Nasdaq OMX Group Inc. didn't respond to requests for comment.

Facebook was also hurt by investors' high expectations of a healthy first-day pop in the price, according to people familiar with the matter. When that pop didn't happen, it prompted a selloff, these people said.

That's when Facebook's underwriters had to step in to support the company's share price, people familiar with the matter said. In particular, lead underwriter Morgan Stanley was assigned to be the deal's "stabilization agent"—meaning it was the firm's job to keep the shares above the offering price, these people said. In that role, Morgan Stanley was forced to buy Facebook shares as the price slid toward $38 in order to prevent the price from crossing into negative territory, according to these people.

Morgan Stanley, which led the platoon of 11 Wall Street banks that arranged the listing, had to dip into an emergency reserve of around 63 million Facebook shares—worth more than $2.3 billion at the offer price—to boost the price and create a floor around $38 a share, according to people close to the situation. In successful IPOs, the reserve, known as the "overallotment" or "green shoe," is used by underwriters to meet soaring demand but in this case, it was used to prop up Facebook's ailing share price.

The process is common in IPOs and works like this: The underwriters have the extra shares available to either sell or buy for a period after the IPO. If demand is strong, they sell them like all the other shares. But if the stock price falls, they can buy them back, effectively creating a floor for the price.

Facebook's price began falling almost immediately after shares began trading. It is unclear exactly when Morgan Stanley stepped in, but traders said that the price movements throughout the day, with the shares occasionally touching the IPO price but never crossing below it, suggested the firm was active throughout much of the session.

Facebook's opening-day travails suggested how tough it can be to live up to high expectations in the market. "There's been way, way too much hype, so it may be impossible not to have it be anticlimactic," said Peter Falvey, managing director of the Boston-based investment bank Falvey Partners LLC.

See also GigaOM, "Facebook IPO: Here is the best of the web" (via Techmeme).