Facebook IPO: What Went Wrong?
One of the most anticipated IPOs to come out in a long-time was the IPO for Facebook. Initially offered at $38 a share, the stock is off to a rocky start. So what went wrong?
A week after the social network’s surprising IPO flop, Wall Street is still trying to figure out exactly what went wrong.
Nicholas Colas, a chief market strategist at ConvergEx in New York, has come up with a list of “musts” for IPOs. By the Colas standard, the Facebook IPO might find itself doomed for all eternity.
Here’s a look at some of the Colas “commandments” and a view of how they apply to the Facebook situation:
Create the Illusion of Scarcity
Facebook failed here, while in comparison Amazon succeeded. Both IPOs were out-of-the-gate busts, but Amazon was able to overcome the lower-than-expected IPO demand, because it started out small with its offering. Facebook flooded the market with shares that fell 24 percent in the first three trading days. Amazon recovered from their initial flop because there IPO was more than 300 times smaller than Facebook’s and thus able to attract demand.
Maintain a Consistent Narrative
In the days leading up to the Facebook IPO, news broke that its revenues were falling and General Motors was pulling its ads. Not good news when your IPO is about to be released.
Make Management Available to Investors
The leaders of the Facebook organization didn’t make themselves as accessible to the media as the public had hoped for. Even though CEO and co-founder Mark Zuckerberg did show up, many investors felt like in Zuckerberg’s mind he was doing them a favor.
Talk to Your Fellow Underwriters
Morgan Stanley and Facebook have come under extreme fire for not being forthcoming with information. There are expected lawsuits to be filed. This is very bad when trying to find new investors.
Know Who is Buying
Colas stresses knowing the difference between “real” buyers who actually want the stock and “flippers” who can’t wait to sell or lend it for short-selling. Many of the initial investors in Facebook, were only looking to flip the stock and make a quick profit.
Don’t be Afraid to Walk Away
A badly managed IPO should not go to market, period. In Facebook’s instance, numerous traders complained about the half-hour delay Nasdaq experienced before opening Facebook last Friday. The traders complained even more that the mechanics still weren’t worked out once trading opened. This bad start hasn’t helped Facebook recover as of yet.