Why Has the Facebook IPO been such a Disaster?

29th May, 2012 - 4 minutes read

Having been one of the most anticipated IPO’s ever it is hard to understand how it’s gone so wrong for Facebook, with share prices hovering at around $32 – a considerable drop from an opening price of $38 and an opening day high of $45. The floatation has been such a car crash that the lawyers are looming and the regulators are on hand. As the dust settles the big questions remain unanswered. Where did it all go wrong? How did disaster strike so fast? And what will happen next?

These questions are yet to be properly answered but many are pointing the finger of blame at the underwriters, Morgan Stanley in particular. According to many US news agencies Morgan Stanley analysts had downgraded Facebook’s growth forecast shortly before the IPO, but failed to make all investors aware. Instead they only warned some investors, who went on to drop their stock as soon as trading started. This could be why disaster struck so fast; those in the know were keen to shed their overinflated stock at the first opportunity.

What’s more trading of Facebook shares on the opening day was delayed by half an hour. The software used to process IPO orders was ‘overwhelmed’ by order updates prior to the float. It is thought that this left investors completely in the dark and unsure of whether or not they had secured stock and at what price. Buy/sell requests that were meant to be filed were not and some cancellations were simply ignored. The confusion and panic that this caused no doubt contributed to the cataclysmic closing price on Facebook’s first day of trading.

It’s difficult to tell what will happen to Facebook stock in the future. It seems to have found a floor for the time being, at around $30, but this is still regarded as too high by many Wall Street veterans.

The past few weeks have been a real black eye for Facebook, who also saw General Motors pull $10million of advertising budget from the social networking site. This could be perceived as a shot across the bows as Facebook’s value is based almost solely on its advertising potential. It’s not so much the financial loss that could be damaging but more the message this sends out to other companies that advertise on Facebook. This message being; General Motors, one of the world’s largest companies, doesn’t think that Facebook advertising works.

It will be interesting to see how the tech giant handles what is their first proper rough patch. Mark Zuckerberg has kept quiet on the recent turmoil as he’s away on his honeymoon, most likely unsure of whether he should be licking his wounds or celebrating that fact that he just got a whole lot richer. He will have to talk eventually as a lot of people want a lot of answers.