Still in control: Mark Zuckerberg
As technology listings go, only those of Netscape in 1995 and Google in 2004 come close, but unlike those two listings the Facebook share has slid dramatically from its listing price of $38.
At the time of writing the share was trading at $31, having slid 11% on Monday and another 9% on Tuesday.
Speculation is mounting for the reasons behind the slide. Allegations are being made that Facebook and its institutional backers withheld critical information from retail investors, resulting in the listing price being artificially inflated.
The Business Insider website reported first that analysts from the three banks underwriting the initial public offering – Morgan Stanley, JP Morgan and Goldman Sachs – had cut their earning forecasts on Facebook but not made this information publicly available, choosing only to provide it to selected investors. The site later alleged that this cut in the earning forecast was made because an unnamed Facebook executive had told them that second-quarter earnings would not be as strong as had been previously expected.
The allegations have attracted the attention of the United States Securities and Exchange Commission and Mary Schapiro, its chairperson, has been quoted as saying that “there are issues that we need to look at”.
Retail investors
The Business Insider article alleged that the institutional investors priced the listing at $32 a share, whereas retail investors were willing to pay $40 a share. Because retail investors made up a large proportion of investors in the listing, the share price was set at $38. The article alleges that Morgan Stanley allocated a much larger number of shares than is normal for this kind of listing to retail investors.
The share opened at $42 and remained above $40 for the opening day thanks to support from Morgan Stanley, but then it slid rapidly to its lower levels.
The listing price put a value on Facebook of more than $100-billion, greater than that of online retail giant Amazon, which has a market capitalisation of $98-billion.
Questions are now being asked about the pricing of the listing. Brian Wieser, an analyst at Pivotal Research, has been quoted by the BBC as saying that a fair price for the listing would have been about $30 because of both the age of Facebook and the unproven nature of its business model.
Concerns
These concerns are being backed up by the price-to-earnings ratio of Facebook: it is 74 times its earnings, which is high compared with the likes of Apple (13.7) and Google (18.6), according to Bloomberg Businessweek.
Although those investors looking for a quick buck are clearly out of luck as many smaller investors take the hit and dump their Facebook shares, the power of the brand and its strength in the social network market are likely to steer it through this period.
The $16-billion it raised provides the company with the cushion it needs for Mark Zuckerberg, who retains 22% of the company and a 57% voting stake, to run it as he sees fit without interference from external influences.
