The bloom quickly fell off Friday’s Facebook IPO, as the wildly overhyped public debut staged by the social media giant and its bankers are now being sued by shareholders for concealing weakened growth forecasts prior to the $16 billion offering.
According to Reuters, defendants including Facebook CEO Mark Zuckerberg and Morgan Stanley were cited as hiding “a severe and pronounced reduction” in revenue forecasts during the IPO marketing process. Two lawsuits have been filed, one in U.S. District Court in Manhattan and the other in a California state court. The New York filing said lowered business forecasts were “selectively disclosed by defendants to certain preferred investors” and not to the general public.
While everyone knew there would be post-IPO challenges, Wall Street and Silicon Valley have been stunned as Facebook shares fell 18.4% from the $38 IPO price in the first three days of trading, reducing the value of stock sold in the IPO by more than $2.9 billion.[more]
When news of Facebook’s challenges in mobile advertising surfaced, prior to the IPO, analysts at Morgan Stanley (now busy adjusting FB prices) and other firms began advising clients to lower their expectations, but ultimately, the bankers and Facebook went ahead with the $38 a share offer price.
“The I.P.O. of Facebook was supposed to be Morgan Stanley’s crowning achievement, but it is turning out to be a big embarrassment, raising broader questions from regulators about the I.P.O. process,” notes the New York Times. “When the dust settles, Morgan Stanley could make more than $100 million in fees on the I.P.O. But rival bankers and big investors have complained that Morgan Stanley botched the debut. They contend that the bank set the price too high and sold too many shares to the public.”
Regulators, including William Galvin, secretary of state in Massachusetts, The Financial Industry Regulatory Authority, and the Securities and Exchange Commission are questioning if information was shared only with certain clients rather than all investors.
Discount broker Just2Trade had hundreds of orders lined up by 11:30 a.m., on May 18th when it received a notification that its orders were still open. As investors flooded their offices with inquiries, Just2Trade tried to contact NASDAQ and Wall Street brokers, to no avail. “I have never experienced this before,” Fuad Ahmed, Just2Trade’s chief executive told the Times. “You are driving a car with a broken windshield. You have no idea what was happening.”
Ad Age’s Jonathan Salem Baskin offered a different take:
The media are awash in stories about Facebook’s IPO “failure” because the stock price hasn’t skyrocketed and made the buyers incomprehensibly rich. It only has made the original shareholders filthy rich…I think every CMO should ruminate on the more nuanced questions about the value of social engagement that the IPO event raises.
“Facebook’s sole function is engagement. It connects people with one another. Its $3 billion in revenue and $1 billion profit come from advertisers who believe that there must be ways for brands to profit from that engagement. They don’t know how to do it yet. The two hypotheses they’re testing are putting ads around it, and trying to actually host some of it via branded pages interspersed with people pages.
“There’s no evidence that either yields much beyond nice-to-have benefit, and some experimenters (most recently GM) have given up trying, for now. Again, since Facebook makes money either way, I’d take a small piece of such failure and consider my life’s work a success.”
The ‘free’ social content that GM promotes on Facebook costs an estimated $30 million for creative and daily maintenance, a key factor in the automaker’s surprise decision last week to pull its paid ads from Facebook, while continuing “free” engagement on its brand pages.
Meanwhile, Facebook is forging ahead with business as usual, welcoming Angry Birds to Facebook and testing cosmetic tweaks to the Timeline design with details of name, occupation, education and location now in reverse type on top of the cover photo, thumbnail images compressed, and a new “Summary” section added, as Talking Points Memo noted.
As it pushes ahead on new revenue streams, Facebook has agreed to settle a proposed class action lawsuit, Reuters reports, that alleged the site’s “Sponsored Stories” feature publicized users’ “likes” without compensation or the ability to opt out, according to a court document filed on Tuesday.
Facebook also just announced a branded entertainment deal with Turner’s TBS comedy-centric cable channel to bundle Facebook ads with its own TV and digital inventory and sell it as a branded content package. The partnership will promote three- to five-minute comedy “shorts” developed by DumbDumb, Arrested Development co-stars and pals Will Arnett and Jason Bateman’s digital entertainment company.
“In our mind,” stated Carolyn Everson, Facebook’s head of ad sales (as VP of global marketing solutions), “we believe that we should capitalize on the social footprint in and around the media content that consumers love and that they consume on Facebook.”
Consumers, regulators, advertisers and newly minted shareholders’ love and consumption of all things Facebook remains to be seen. “There is a stigma around a broken deal, and Facebook is a broken deal,” Connor Browne, a managing director for Thornburg Investment Management told The New York Times.
One other interesting twist today: Facebook is apparently, Reuters hears, “mulling” a pitch to move its listing from NASDAQ to NYSE Euronext.