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| Mark Zuckerberg, Facebook's co-founder and chief executive introduces 'Home' a Facebook app suite that integrates with Android during a Facebook press event in Menlo Park, California, April 4, 2013. |
One year ago tomorrow, social networking phenomenon Facebook went public in one of the most highly anticipated initial public offerings of the last decade.
Leading up to the IPO, which valued the company at a whopping $104
billion — or 100 times earnings — the hype was intense. Facebook, market
prognosticators predicted, would soar in the first day of trading,
generating easy gains for the investors who rushed for a piece of the
action. Indeed, investor demand was so intense that Facebook boosted by
25% the amount of shares it planned to sell to the public. Finally, on
the morning of May 18, after months, even years, of anticipation,
Facebook founder and CEO Mark Zuckerberg rang NASDAQ’s opening bell by remote from Facebook’s campus in Menlo Park, California.
And then all hell broke loose.
Technical glitches on the NASDAQ exchange delayed the first trades
for 30 hair-raising, white-knuckled minutes. After the NASDAQ commenced
trading, Facebook shares jumped 13% to hit $43, only to retreat quickly
to the initial offering price of $38. At that point, Facebook’s IPO
underwriters, including the largest banks on Wall Street
led by Morgan Stanley, stepped in and waged a furious buying battle to
support the offering level. Thanks to their efforts, Facebook closed a
frenetic first day of trading at $38.23, essentially flat.
Although Facebook shares slowly climbed back above $30 by January of
this year, momentum stalled and Facebook shares are currently bouncing
around $26 per share, down more than 30% since the IPO. For Facebook,
the IPO was a major success because it raised over $10 billion for the
company. But for investors, Facebook’s IPO is widely considered to be
one of the most disappointing public stock offerings in U.S. history.
One year ago, TIME published an
article examining the kind of revenue opportunities Facebook might
seize upon to justify its sky-high valuation. Looking back at the list,
many of those opportunities remain untapped. The company has only
scratched the surface, for example, when it comes to leveraging the vast
hoard of user data it is accumulating. A true Facebook phone hasn’t
materialized, nor has a credit card-based E-commerce “passport.” And
though Facebook recently announced a “semantic” search engine, it shows
no signs of threatening Web search titan Google’s dominance.
But there have also been some notable successes. Facebook’s mobile efforts, in particular, are starting to achieve impressive
results. Last quarter, 30% of Facebook’s ad revenue came from mobile
devices, up from 23% during the previous quarter and 14% the quarter
before that. In the first quarter of 2012, Facebook’s mobile revenue
constituted 0% of its total revenue. Perhaps most important, Facebook’s
share of mobile time spent online is soaring, offsetting desktop
declines. Facebook’s share of mobile minutes has doubled from 11% to 22%
over the last year, according to JP Morgan. The company has also begun
packing more ads into the News Feed.
A year ago, we also asked if Facebook could possibly maintain its
“cool factor” in the long term. The answer is that it might not matter:
While there are signs that younger users are increasingly using other
social services, Facebook remains far and away the top social network on
the web. Overall, in fact, Facebook seems to be maturing into a
reliably profitable public company, even if its share price remains more
than 30% below the IPO level.
The ill-effects of that IPO, however, still represent a lingering
cloud hanging over the company. In the immediate aftermath of the
offering, recriminations flew fast and furious. NASDAQ CEO Robert
Greifeld told a conference of corporate directors at Stanford
University’s Law School that “arrogance” and “overconfidence” among
NASDAQ officials were partly to blame for the technical breakdowns that
plagued the offering. Simply put, the NASDAQ’s systems, which had been
repeatedly tested before the offering, couldn’t handle the massive
volume of trading. NASDAQ’s breakdown may have spooked investors,
causing many to sell, driving the stock price down, as Facebook
suggested in a legal filing last year.
Irate investors filed dozens of lawsuits against Facebook, its
underwriters, and the NASDAQ. One set of suits alleged that Facebook’s
IPO documents “were negligently prepared and failed to disclose material
information about Facebook’s business, operations and prospects.”
Specifically, the lawsuits charged that Facebook hid the financial
impact of challenges to its mobile advertising business — challenges
that would have been material information for prospective Facebook
investors.
Another set of Facebook lawsuits charged that company executives gave
the underwriters more detail about the financial impact of challenges
to its mobile advertising business than they did to the investing
public. The underwriters, in turn, lowered their financial forecasts,
which they then “selectively disclosed” to big, favored clients like
hedge funds and institutional investors, but not the public, according
to the lawsuits.
Predictably, Facebook maintained that it acted appropriately, by
updating its IPO documents with the SEC before the offering to reflect
that the number of daily users was increasing faster than the number of
ads the company was serving, a change it attributed to its fast-growing
mobile user base. (Facebook’s SEC update was delivered in dense,
financial legalese, but may in fact have satisfied the disclosure
requirements.)
Thirty-one of the lawsuits have now been consolidated into one
umbrella case before a judge in the Southern District of New
York. Earlier this month, Facebook asked
a judge to throw out the umbrella lawsuit, arguing that it had no
obligation to publicly disclose internal data on how increased mobile
usage might affect the company’s financial performance. But Facebook’s
legal headaches continue. Less than two weeks ago, the company was hit by a new IPO-related lawsuit seeking to hold Zuckerberg and other executives responsible for the botched offering.
Given the immense financial windfall the IPO delivered to Facebook
insiders, it’s not hard to understand why ordinary investors were upset.
Zuckerberg cashed out to the tune of $1.14 billion. Early investors
Accel Partners, DST Global, Mail.ru Group and Tiger Global generated
$2.1 billion, $1.7 billion, $745 million, and $722 million,
respectively. Tech mogul Peter Thiel sold $638 million worth of shares.
And Wall Street titan Goldman Sachs cashed out to the tune of $923
million.
Of course, venture capitalists and early employees took big risks,
and deserve to be rewarded. But the contrasting fortunes of company
insiders, who made billions, and ordinary shareholders, who saw their
Facebook investments fall off a cliff, raised basic questions about the
fairness of the IPO process. Facebook’s IPO reinforced the stereotype
that the IPO process gives deep-pocketed investors and well-connected
insiders an advantage over everyday investors.
Facebook is making good progress on several fronts, especially
mobile, but the company needs to significantly boost earnings growth if
it wants to see its stock price return to its IPO level. Right now, the
market just doesn’t see that happening. “Facebook’s share price is
telling you that investors are more skeptical about the company’s
prospects than a year ago,” Wedbush analyst Michael Pachter told
MarketWatch. Another thing investors are likely skeptical about? The
IPO process itself. As the old adage goes: “Fool me once, shame on you.
Fool me twice, shame on me.”
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