Facebook (FB) Stock Price Chaos: Did Facebook and Morgan Stanley Cheat the Public?


What was supposed be the largest IPO operation ever for a technology firm is about to turn into a nightmare and scandal for Wall Street.

In only a few days of trading "FB" shares have lost about 16% of their original value and the company billions of dollars. Not only Facebook, its underwriters, led by Morgan Stanley and the Nasdaq stock exchange, are under investigation by government and industry regulator on how the IPO procedure was handled. Complaints have been filed against all of these parties, including the CEO Mark Zuckerberg, by aggrieved shareholders.

It has emerged that Facebook issued revised forecasts about its 2012 finances which showed some earnings and revenue decline for the year. Though the reduction was not that “spectacular,” it was also not negligible: the expected 2012 turnover was decreased by approximately $200 million to $4.8 billion, the annual growth cut to 30.4% from 36.7 %, and earnings per share for 2013 were also reduced to 3% from 6% previously published.

A source close to the matter revealed that the company, concerned by its users' shift to mobile platforms, which are less profitable in terms of advertising revenue, asked analysts to lower their estimates. But this new detail on Facebook prospects was only revealed to some of their big institutional investors, prior to the IPO operation, leaving small customers in the dark. This can also explain why some company insiders were massively liquidating their FB shares just a day before it went public.

Now questions are rising about the real FB stock value and whether those items, if disclosed to the general public would have impacted on investors’ decision in buying and/or selling the shares.  

Yes the FB shares were “slightly” overvalued, though it’s hard to tell by how much. According to Thomson Reuters analysts, the accurate IPO value should have been at about $9.59. That is four times cheaper than the introductory price. The other problem is that they these shares were also over-issued.

Facebook and its underwriters were just too greedy, as most of the FB shares were detained by them and only few left for the public. They certainly overplayed the enthusiasm around the IPO operation and misinterpreted the market's real mood. Some investors did rush to buy, but that was before realizing they had probably over paid for the shares.

Nonetheless, it seems that the company is seeking to partly attribute its failed debut and the stock tumble to Nasdaq, after technical glitches affected trading. Indeed, Facebook is now considering switching its listing to the New York Stock Exchange. But it’s not the stock exchange that advised Facebook to overprice their shares or increase their volume by 25%.

As for Mark Zuckerberg, he lost a lot of his credibility in the stock market. The young man with hooded sweatshirts who bristles with business success is now ridiculed as an “arrogant” guy who only wanted "to exceed 100 billion valuations."