Zuckerberg loses $2bn as Facebook share price plummets

Shares plunged by nearly $5, or more than 10%, from their Friday closing price of $38.23 when trading began.

Zuckerberg’s fortune, based on his shareholding, stood at $18.95-billion at Friday’s $38 offer price. But within minutes of the shares going on sale again, they plunged by more than 10% as underwriters deserted the stock and questions continued to be asked about how the Nasdaq stock exchange has handled the controversial flotation.

Pre-market trading had seen heavy selling of the stock, which was supported just above its $38 listing price on Friday afternoon by the major banks who bought shares ahead of the flotation.

But within minutes of the shares going on sale again on Monday they were in free fall and were soon trading close to $33 before recovering to $34.63, a fall of nearly 10% on Friday’s closing price of $38.23.

The fall added to the embarrassment over the Friday share issue, when trading on Nasdaq was delayed by more than 30 minutes due to technical glitches. Facebook’s arrival set a record transaction volume for a market debut, with nearly 89-million shares traded.

But by midday on Monday in the US, some investors still did not know whether their Friday orders to buy or sell the shares had gone through. “I heard a lot of brokers ranting and raving on Friday about this,” one adviser to Morgan Stanley’s brokerage affiliate, Smith Barney, told Reuters.

‘Humbly embarrassed’
The adviser said Smith Barney had a “large number” of market orders that were entered Friday for the trading debut of Facebook stock that had still not been reconciled.

Nasdaq’s chief executive, Robert Greifeld, said at the weekend he was “humbly embarrassed” by the outcome and that the exchange had modified its system for handling initial public offerings as a result.

“It was just a poorly done deal and it just so happens to be the biggest deal ever for Nasdaq and they pooched it, that’s the bottom line here,” said Joe Saluzzi, co-manager of trading at Themis Trading in Chatham, New Jersey.

Henry Blodget, the former Wall Street analyst who ahead of the IPO called the shares “muppet bait”, said on his Business Insider site on Monday that the lack of big jump in first day trading was probably good news for millions of small investors, who were discouraged from piling into the stock.

He reckons that a fair value for the company would be somewhere between $16 and $24 a share, depending on its results. That would value it at between $500-billion and $85-billion – a substantial amount, but far from the $104-billion that the $38 share price put on it.

Investor sentiment cooled over the weekend after seeing the lack of a spectacular jump in price for the shares on Friday. But the Nasdaq itself rose 2% as US stocks rebounded from their worst week in a year. Apple’s stock rose by $21, or 4%, apparently as some investors who had unloaded its shares last week to buy Facebook reversed their positions.

Overestimated demand
Wedbush analyst Michael Pachter, who came out with an “outperform” rating on Facebook before its IPO, said he thought underwriters had overestimated demand for the company’s stock. Last Tuesday, the underwriters, led by Morgan Stanley, increased the offering’s price range from $28-$35 to $34-$38.

On Wednesday, Facebook’s early investors and other stockholders increased the number of shares they were selling in the IPO. Both had seemingly been signals that there was strong demand for shares.

“The late addition of 84-million shares to the offering overwhelmed demand, limiting the first day price,” Pachter said in a note to investors.

Having been listed at $38, with a greater number offered due to “high demand”, the shares then began trading on Friday – after an embarrassing glitch – at $42.02. But they soon came off that level, to settle at a closing price of $38.32.

By Monday, sentiment had apparently turned against Facebook so thoroughly that underwriters seeking to unload the shares were forced to take substantial losses as the market marked the shares down.

Having seen a number of investment funds buy the shares on Friday, as fund managers loaded up in the expectation that Facebook would bring a boost to their portfolio, the remaining buyers in the market on Monday were less willing to pay a premium – leaving the underwriters with no option but to accept a loss if they wanted to pass the shares on. – © Guardian News and Media 2012

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Charles Arthur
Charles Arthur works from Tranquility Base Hotel & Casino. Journalist, speaker, moderator. The Guardian’s Technology editor 2009-14. Coming May ‘18: Cyber Wars, on hacking. Prev: Digital Wars: Apple v Google v Microsoft Charles Arthur has over 74656 followers on Twitter.
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