By Douglas Cohn and Eleanor Clift
WASHINGTON — When Facebook went public last Friday, 80 million shares traded in the first half hour, evidence of the storied company's hold on the public's imagination, as well as its pocketbook. In the days since, questions have arisen about the true value of Facebook shares, and whether their value was deflated at the last minute to advantage big institutional investors at the expense of the average investor.
For Mark Zuckerberg, the founder of Facebook and its chief executive, it was a week of highs and lows. He celebrated his 28th birthday and his marriage along with an IPO that raised billions, only to see his good publicity come to a screeching halt with a likely SEC investigation and a potential criminal inquiry that could lead to charges of insider trading.
Here's what happened: On the days immediately before the public offering, investment banking firm Morgan Stanley let it be known the stock would be priced from $28 to $32 per share. There was so much hype surrounding the IPO that investment bankers warned clients they probably couldn't get all the stock they wanted. Then, just before trading began, Morgan Stanley and Facebook raised the price to $38 per share while dramatically increasing the number of shares — all this while Morgan Stanley and others warned their biggest investors and best clients they weren't sure that price was justified. They lowered their estimate of Facebook's annual revenue.
Enough of the forewarned bailed out so suddenly there was more stock available for the uninitiated. Investors who had been worried about getting shortchanged on this hot new stock were suddenly told there were more shares available, and they could have all they wanted — a tip-off that something was awry.
Soon after opening and rising to $42 per share, the stock started tanking, and at the end of its third day of trading on Tuesday, May 22nd, Facebook closed at $31, some 26 percent below Friday's $42 price. What did Zuckerberg know and when did he know it? The answer might be nothing, and that this fiasco falls at the feet of Morgan Stanley. The Wall Street firm says it did nothing illegal, but for whatever reason, they set the initial price of Facebook too high, made too many shares available, and the public took a bath — not Morgan Stanley's big investors.
In everyday parlance, it's known as a sucker bet. The big guys got enough warning that Facebook's IPO would be a bust; and they bailed out even as the public was still running to lay claim to the storied stock. That suggests insider knowledge.
After raising billions and winning plaudits for his creative and financial acumen, Zuckerberg was hemorrhaging millions. His balance sheet will likely come out okay given the magnitude of the money raised by the company and its selling stockholders, but Wall Street and its shenanigans are once again in the headlines.
Zuckerberg owns 57 percent of Facebook stock and reportedly runs the company with an iron hand, so what's happened is a blow to his fabled genius, along with his company's hand-picked management team. But the more pertinent question is how the news spread of Facebook's plummeting assessment, and what it says about social-media businesses more generally — are they more sizzle than steak, and what happens once the sizzle fades. Is there life after hype?
Favored investors were let in on what was happening, and whether Morgan Stanley or their sources at Facebook broke any laws, or rules, will be the subject of an SEC inquiry. Facebook's image suffers, along with Zuckerberg's, and the hype around this IPO should serve as a cautionary tale to all the other Internet prodigies. At least this time, the rise and fall has been out in the open where all can see for themselves who wins and who loses when a company goes public, and how a heads-up of even minutes can make the difference between cashing in or being duped.
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