Facebook IPO Fiasco and Beyond…….

This was the most talked about IPO of all the time. Enough buzz was created. Share prices were revalued and were raised. Street had lot of expectations from this IPO. This IPO was expected to be as successful as other big and much talked IPOs from Palo Alto. World’s youngest billionaire was set to get real rich. This IPO was going to prove that a college dropout wearing a hoody and having an idea in mind was right. The site had thus far managed to change the social media experience dramatically. With 900 million users from all over the world, the IPO was The Most Happening Thing around. So with a lot of buzz and excitement issue was opened and not to anyone’s surprise was oversubscribed.

On 18^th May, Facebook was going to be listed on NASDAQ. Usually trading for newly listed stocks starts a bit late than normal after the bell which is around 11’o clock, but in this case trading didn’t start till 11.30 due to technical glitch. Once listed Facebook managed to touch $ only to close at $38.23 mere 23 cents up from its initial price. Since then the stock has lost around 18 %.Investors are going mad over many issues. So what caused all this? Where did the IPO which was supposed to be a hit, failed instead?

There are many issues that contributed to the Facebook Fiasco such as -

• General Motors Announcement

Couple of days before the Facebook was set to get listed on NASDAQ, General Motors one of the world’s largest automobile manufacturers dropped a bomb saying that it’s pulling out ads from Facebook worth $10 million as Facebook Paid Advertisements are not proving to be beneficial for the company. Though the amount is not that big it certainly created a negative sentiment about Facebook as GM is one of the biggest automobile companies around the world. Investors feared that other companies may follow GM’s path and withdraw ads which could affect the earnings.

• Underwriters’ Effect

Generally stocks of the hyped and much talked IPOs shoot up on the first day itself which allows investors to earn some extra money. In case of Facebook the stock did manage to jump but for a short duration which didn’t help small and medium investors in any way. So what was the reason behind this short run?

The reason was the earnings estimate of the Facebook which was revised by the underwriters and they had cut the estimated because Facebook had given them information about how business outlook was not looking so good. When this all was happening the worst thing was that this information was not being conveyed to the retail investors. Only large investors had this info through underwriters. Which made Retail Investors angry leading to filing lawsuits.

• NASDAQ Glitch

Whenever a new stock is listed on NASDAQ after the bell usually trading starts at 11’o clock. But in case of Facebook the trading didn’t start till 11.30.The reason behind this is said to be the technical glitch. Facebook being the most talked IPO ever was the hottest stock. Everybody wanted to have a piece of it. Huge orders were expected and were being placed. The orders were so huge that NASDAQ system couldn’t withstand the load and crashed!

After trying to resolve the issue NASDAQ decided to run on an alternate system. This problem caused the delay in trading. Also due to the system glitch many orders were not confirmed, traders had problems in cancelling orders and lost control over trading platform.

• Retail Investor Consensus

Majority of Retail Investors were not able to get their hands on the stock on the first day and next few days. So most of them are going for ‘wait and watch’ approach to assess the stock.

Facebook  has managed to grow at a significant rate over the past few years. The main Revenue generation source for Facebook has always been advertisements. But according to the recent reports launched by the Facebook no. of mobile users have grown and soon will be dominant. Facebook advertisements are designed for desktop of Full Site usage, for Mobile sites Facebook has still not developed any platform. So it is unclear how Facebook will be generating the revenue when mobile users will dominate the userbase.

And let’s face it Facebook is Overvalued; it has to get the price –earnings ratio right to win investors’ confidence. Investors are being cautious about this IPO as out of 19 social media IPOs in 2011, 16 are trading below offer price.

This all affects the investor thinking process and decision making process forcing them to take cautious approach. So at least for next few days the stock will remain in the hands of larger investors till retail investor’s gain confidence in the stock.

So what next for Facebook?

Facebook story isn’t over yet. Every organization at some point of time comes across such situation where they have to Re-invent their business strategy. Facebook is currently at that stage. Increase in mobile application userbase indicates the urgency to invent the right platform for mobile advertisement. Also, revenue generation only through Advertisement model needs some changes. Facebook has to find an alternate source of revenue generation without breaking ‘Free and Always will be’ promise. Also being a public listed company Facebook will now face pressure from investors to get the good results.

Facebook has always been changing. It’s an organization which takes ‘Change is Inevitable’ seriously and due to which it has managed to keep users interested into their site. Now with funds from IPO to get the best talent and services, Facebook will again prove that it can adapt and sustain in any challenging environment.