Facebook – From Stealing Idea to Cheating Investors?

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May 24 2012
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The story of Facebook was full of controversies – from the moment the company’s birth to its IPO last Friday. Mark Zuckerberg, then 19-year-old, was accused of stealing Facebook’s idea, the source code and the business plan for Facebook in 2003 from Harvard seniors, Cameron and Tyler Winklevoss. And now the company which was supposed to be the new darling of Nasdaq stock is courting multiple lawsuits. Ask any superstitious Chinese and they’ll probably tell you the new couple, Mark Zuckerberg and Priscilla Chan, were not meant for each other hence the turbulence after Facebook floated on the stock market.

Mark Zuckerberg and Priscilla Chan Wedding

The excitement started when Facebook’s lead underwriters Morgan Stanley, JP Morgan, and Goldman Sachs, all cut their earnings forecasts for the company in the middle of the IPO roadshow – something which is strange and highly unusual. But that was not the cream of the cake. It attracted controvery because some bad news (about estimate cut) was passed to only a handful of big VIP investor clients, not smaller investors who were considering investments in Facebook. And when there was selective dissemination of “material information”, people screams “cheating”.

Apparently, analysts cut their estimates because a Facebook executive who knew about the company’s weakening or deterioting business revealed the information hence the sudden cut. However, the information was whispered verbally conveyed to selected sophisticated institutional investors only (Yeah, the same way PM Najib Razak whispered his apology to an attacked journalist recently). Those who didn’t know about it and bought Facebook stock on the IPO were unfairly exposed to the selling pressure thereafter. Generally an estimate cut in any company’s (potential) earnings is considered negative news, what more if such cut came from underwriters themselves.

Facebook Opening Trading on Nasdaq

The SEC and FINRA are now going to investigate what really happened with Facebook’s IPO, especially whether or not Morgan Stanley and Facebook shared negative news with institutional clients without telling the public at large. But most people do not have high hope on impotent SEC. It was obvious there’s a violation of securities laws but SEC is expected to do nothing about it. So, why all three analysts namely Morgan Stanley, JP Morgan and Goldman Sachs cut Facebook earnings estimate? Will Facebook announce a weak second quarter earnings?

A source said the underwriter’s analysts were tipped by Facebook financial executive to cut the company’s estimate and that speaks volume about the social networking’s future earnings. If such guidance was not enough, the increase in terms of IPO price and number of shares allocated to public put more selling pressure on the stock. Already, Facebook’s shares were delayed by two hours on its first day of trading with investors complained of glitches in confirming that trades even took place. You can’t blame the angry investors considering the stock tumbled from IPO price of $38 a share to $32 after Wednesday closing, a 15% decline, or 28% loss if you bought at intra-day high of $45 a share last Friday.

Facebook Stock Price Since IPO Friday

On Tuesday, Maryland investor Phillip Goldberg sued the stock exchange in federal court in New York, accusing it of failing to timely execute trades, causing him and others to lose money. Knight Capital Group Inc said its second-quarter results will be hurt by losses related to numerous issues during the listing and has submitted claims for financial compensation from Nasdaq OMX and is considering all legal remedies available. There’re of course many small investors such as 40-year-old software engineer Niels Hansen and real estate property manager Randy Wilk who wish their $42 a share buy for the stock were not filled. For once, you’re wondering where are the Occupy Wall Street folks when you need them (*grin*).

Facebook IPO Nasdaq

Nevertheless, there’re winners who sold early into IPO opening day and as a result, they saved hundreds of millions which otherwise would vaporise due after the stock sunk to $31. Facebook founder Mark Zuckerberg did himself a favour when he managed to unload 30.2 million shares at $37.58, making a cool $1.13 billion and in the process saved a handsome $174 million.

  • Mark Zuckerberg
    • Shares sold: 30.2 million
    • Value: $1.13 billion
    • Saved: $174 million
  • Accel Partners, venture capital investor
    • Year invested in Facebook: 2005 for $12.7 million
    • Shares sold: 49 million
    • Value: $1.86 billion
    • Saved: $341 million

    Peter Thiel and Mark Pincus profit in Facebook investment

  • Peter Thiel, PayPal co-founder
    • Year invested in Facebook: 2004 for $500,000
    • Shares sold: 16.8 million
    • Value: $640 million
    • Saved: $119 million
  • DST Global Ltd, investment firm based in London and founded by Russian oligarch
    • Year invested in Facebook: 2009 and late 2010 for $200 million
    • Shares sold: 45.7 million
    • Value: $1.74 billion
    • Saved: $323 million
  • Goldman Sachs, investment bank
    • Year invested in Facebook: 2011 for $450 million
    • Shares sold: 28.7 million
    • Value: $1.09 billion
    • Saved: $200 million
  • Elevation Partners, private equity firm with Bono as spokesman
    • Shares sold: 4.6 million
    • Value: $176 million
    • Saved: $3.3 million
  • Greylock Partners, venture capital investor
    • Year invested in Facebook: 2006 for $27.5 million
    • Shares sold: 7.6 million
    • Value: $289 million
    • Saved: 53.4 million

Facebook Prospectus

For now, analysts who were upset with Facebook’s IPO fiasco are giving negative views on the stock with Thomson Reuters Starmine estimating the stock could fall as low as $9.59 a share (*OMFG*). Legendary finance professor, Aswath Damodaran, however offered a more generous valuation at $29 a share, providing the social networking giant can maintain a compounded revenue growth of 40% for the next 5 years and a pre-tax margin of 35%. Already, Facebook is toying with the idea of allowing younger age kids to open an account, an indicator that the company could be in trouble meeting the high expectation post-IPO.

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Looks like all the ‘insiders’ sold pronto. As usual left the small investors holding the crap….

Hi FT,

FGVH is offering shares to the public in the
ongoing IPO, care to share with your readers
whether the shares are worth applying ?

Dear Sir,

I am thinking of applying for FGVH shares but kind of discouraged by Facebook recent IPO.

I am sure there are many readers of your excellent blog pondering about the same issue and hope you can shed some light for us.
Will really be grateful if you share with us your thought on this million dollar question:-

FGVH current IPO exercise; will the share price performance follow Fabcebook upon listing ?

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