Facebook's public debut had plenty of buzz but not much pop. The shares opened 11% higher, but soon struggled to stay above their offering price. David Benoit and Shayndi Raice have details on The News Hub. Photo: Reuters.
Facebook Inc. took eight years to stage one of the most anticipated initial public offerings ever. The anticlimax came Friday, as Wall Street bankers struggled to prevent the newly minted stock from ending its first day with a loss.
The stock had been widely predicted to soar on its first day. Instead, up until the closing moments of the trading session, Facebook's underwriters battled to keep the stock from slipping below its offering price of $38 a share. Such a stumble would have been a significant embarrassment, particularly for a prominent new issue like Facebook, the most heavily traded IPO of all time.
In the end, the bankers succeeded. When trading on Nasdaq ended at 4 p.m., the social network's stock was up just a hair, 0.6%, at $38.23.
The roller-coaster day—Facebook's shares started out jumping roughly 11%, before cooling off—was also beset by trading glitches and a 30-minute delay in the opening of trading. Nasdaq OMX Group Inc. didn't respond to requests for comment.
Facebook was also hurt by investors' high expectations of a healthy first-day pop in the price, according to people familiar with the matter. When that pop didn't happen, it prompted a selloff, these people said.
That's when Facebook's underwriters had to step in to support the company's share price, people familiar with the matter said. In particular, lead underwriter Morgan Stanley was assigned to be the deal's "stabilization agent"—meaning it was the firm's job to keep the shares above the offering price, these people said. In that role, Morgan Stanley was forced to buy Facebook shares as the price slid toward $38 in order to prevent the price from crossing into negative territory, according to these people.
Morgan Stanley, which led the platoon of 11 Wall Street banks that arranged the listing, had to dip into an emergency reserve of around 63 million Facebook shares—worth more than $2.3 billion at the offer price—to boost the price and create a floor around $38 a share, according to people close to the situation. In successful IPOs, the reserve, known as the "overallotment" or "green shoe," is used by underwriters to meet soaring demand but in this case, it was used to prop up Facebook's ailing share price.
The process is common in IPOs and works like this: The underwriters have the extra shares available to either sell or buy for a period after the IPO. If demand is strong, they sell them like all the other shares. But if the stock price falls, they can buy them back, effectively creating a floor for the price.
Facebook's price began falling almost immediately after shares began trading. It is unclear exactly when Morgan Stanley stepped in, but traders said that the price movements throughout the day, with the shares occasionally touching the IPO price but never crossing below it, suggested the firm was active throughout much of the session.
Facebook's opening-day travails suggested how tough it can be to live up to high expectations in the market. "There's been way, way too much hype, so it may be impossible not to have it be anticlimactic," said Peter Falvey, managing director of the Boston-based investment bank Falvey Partners LLC.
Flanked by Chief Operating Officer Sheryl Sandberg, Mr. Zuckerberg told the crowd to remember the IPO was just one day. "Going public is an important milestone," said the 28 year old, sporting his trademark hoodie. "But here's the thing. Our mission isn't to be a public company. Our mission is to make the world more open and connected." He closed with, "Stay focused and keep shipping."
The social network last month reported that its first-quarter sales declined from the prior quarter, and that profit also slumped, though revenue was up from a year earlier. Advertisers such as General Motors Co. GM -1.99% have publicly questioned the utility of Facebook's ads. And Facebook must grapple with privacy issues as well as concerns over its strategy in mobile devices and the complex China market, among other things.
"Facebook's got a great run ahead of it, but things keep moving," said Deepak Kamra, a general partner at venture-capital firm Canaan Partners. "Platforms come and go."
For the day, however, the offering drew in investors large and small. Theophilus Hodges, a 36-year-old property manager, stopped into an E*Trade branch in downtown Chicago Friday morning specifically to open an account to buy Facebook shares. Mr. Hodges said he plans to invest $10,000 in Facebook shares, using $4,500 of his own money and $5,500 from his mother. "If it wasn't for Facebook, I wouldn't be here," he said.
Some investors who had bought Facebook shares in private transactions in the so-called secondary market before the IPO said they were disappointed the social network didn't have a strong first-day pop. "If the stock were trading in the $50s right now, I might be fighting off some momentary giddiness, but I can't take giddiness to the bank," said Kevin Landis of the $85 million technology fund Firsthand Capital in San Jose, Calif., which bought Facebook at about $31 a share on the secondary market.
Yet even if some institutional investors felt let down, Facebook's early venture-capital investors were jazzed. David Sze, a venture capitalist at Greylock Partners, which invested about $12 million in Facebook in 2006 at a $525 million valuation, faced criticism at the time for what was viewed as an expensive deal. Greylock now owns a stake in Facebook valued at as much as $1.15 billion. "No one ever believes at the beginning," Mr. Sze said, adding that his partners are "feeling very happy."
The hours leading up the IPO on Friday morning were busy at Facebook. Late into Thursday night, hundreds of employees huddled around their computer screens and goofed off, playing hockey or giving impromptu concerts.
At around 6:30 a.m. Pacific Time on Friday, hundreds more employees returned to the campus to watch Mr. Zuckerberg ring in Nasdaq's opening bell. Facebook engineers had rigged the button to automatically post the message, "Mark Zuckerberg has listed a company on NASDAQ - FB," on his own Facebook profile as he rang the bell.
But on the other side of the country, on Wall Street, traders were exasperated by a 30-minute delay in the opening of the stock, which didn't begin trading till around 11:30 a.m. Eastern. Nasdaq officials told members in a notice at noon that its staff was "investigating an issue in delivering trade execution messages" from trades made in Facebook's IPO. Around 1 p.m., Nasdaq indicated it would provide a "manual report" to brokers with information on Facebook trades.
Once the stock opened, trading was robust. More than 200 million shares changed hands in the first hour, as investors rushed in to buy, and some who had received stock from the IPO cashed out. By day's end, 571 million shares traded hands.
The glitches that beset Nasdaq on Friday helped contribute to the lackluster price for Facebook shares, according to people familiar with the snafus. One of the biggest problems, these people said, was that buyers and sellers of Facebook shares weren't provided confirmation of their trades until 2 p.m. That's akin to people not knowing how much money is in their bank account, and therefore not knowing whether to go out and spend more money or save.
Lead underwriter Morgan Stanley received about 38% of the IPO shares to distribute, while J.P. Morgan got 20% and Goldman Sachs Group Inc.'s allotment was roughly 15%. Morgan Stanley is expected to command the largest percentage of more than $175 million in fees from the IPO.(courtesy:wsj.com)
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