Facebook IPO

Facebook was founded in 2004 with a mission to make the world more open and connected. People use
Facebook to stay connected with friends and family, to discover what's going on in the world, and to share
and express what matters to them. Since its inception, Facebook experienced rapid growth in the number
of users and their engagement. The growth may be gauged by the facts that it had 901 million MAUs as
of March 31, 2012, an increase of 33% as compared to 680 million MAUs as of March 31, 2011,
526 million daily active users (DAUs) on average in March 2012, an increase of 41% as compared to
372 million DAUs in March 2011 and more than 125 billion friend connections as of March 31, 2012.

How it Create Value for Users: The top priority of Facebook is to build useful and engaging products that
enable its users to: Connect with Friends, discover and learn, express themselves, control what they share
and stay connected with friends on mobile devices.

How it Create Value for Developers Through the Facebook Platform: The Facebook Platform is a set of
development tools and application programming interfaces (APIs) that enables developers to easily
integrate with Facebook to create social apps and websites and to reach our 900 million users. Platform
developers build experiences that allow our users to connect and share with friends while engaging in a
wide range of activities. Platform developers range from a student on his or her computer at home to
teams of programmers at leading websites. Facebook is focused on the growth and success of Platform
developers by enabling: Personalized and Social experience, social distribution, online payments
infrastructure.

How it Create Value for Advertisers and Marketers: Facebook offer advertisers and marketers a unique
combination of reach, relevance, social context, and engagement: ability to reach a vast consumer
audience, allow advertisers to select relevant and appropriate audiences for their ads, ability to include
social context with their marketing messages

The IPO:
Facebook offered 421,233,615 shares of its Class A common stock. The net proceeds from the sale of the
Class A common stock that the company was offering was expected to be approximately $6.8 billion,
based on the initial public offering price of $38.00 per share, after deducting underwriting discounts and
commissions and estimated offering expenses payable by the company. The principal purposes of the
initial public offering were to create a public market for their Class A common stock and thereby enable
future access to the public equity markets, obtain additional capital, and facilitate an orderly distribution
of shares for the selling stockholders. The company intended to use the net proceeds from the initial
public offering for working capital and other general corporate purposes; however they did not have any
specific uses of the net proceeds planned.
Facebook specified its risk factors in the prospectus in the following words:

Our business is subject to numerous risks. One should carefully consider these risks before making an
investment. Some of these risks include:

If we fail to retain existing users or add new users, or if our users decrease their level of engagement with
Facebook, our revenue, financial results, and business may be significantly harmed;
We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction
in spending by advertisers with Facebook, could seriously harm our business;
Growth in use of Facebook through our mobile products, where our ability to monetize is unproven, as a
substitute for use on personal computers may negatively affect our revenue and financial results;
Facebook user growth and engagement on mobile devices depend upon effective operation with mobile
operating systems, networks, and standards that we do not control;
We may not be successful in our efforts to grow and further monetize the Facebook Platform; Our
business is highly competitive, and competition presents an ongoing threat to the success of our
business;
Improper access to or disclosure of our users information, or violation of our terms of service or policies,
could harm our reputation and adversely affect our business;
Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy,
data protection, and other matters. Many of these laws and regulations are subject to change and
uncertain interpretation, and could harm our business;
Our CEO has control over key decision making as a result of his control of a majority of our voting stock;
The loss of Mark Zuckerberg, Sheryl K. Sandberg, or other key personnel could harm our business;
We anticipate that we will expend substantial funds in connection with tax withholding and remittance
obligations related to the initial settlement of our restricted stock units (RSUs);

 The market price of our Class A common stock may be volatile or may decline, and you may not be able
to resell your shares at or above the initial public offering price

Despite the substantial risk factors as specified in the prospectus of the company, the IPO was
breathlessly hyped by the Facebook and its underwriters, led by Morgan Stanley, as the biggest tech IPO
in U.S. history. The IPO was already expensive by almost any measure, and then underwriters raised the
price at the last minute. They also added more shares to the offering.
However, it's good to know that the laws of supply and demand still apply, even to a social media
company that was billed as the can't-miss IPO of the decade. If you price something too high, people
won't buy. If you try to sell more than people want, the price will fall. That's as true on Wall Street as it is
at a farmers' market.
The IPO turned into a huge Wall Street debacle, with lots of confusion and now, lawsuits are swirling
around. The strangeness began at the most basic level: actually opening Facebook for trading on 18 May
2012. The regular U.S. stock markets trading day begins at 9:30 a.m, but IPOs listed on the Nasdaq
exchange typically don't start trading until at least an hour later. Nasdaq told traders early Friday that it
expected Facebook (FB) shares to begin trading at 11 a.m.
Then 11 a.m. came and went -- with no trading. The next half-hour was full of handwringing and
confusion; until shares began trading around 11:30 a.m. Trading was fast and intense, with more than 80
million shares changing hands in the first 30 seconds. Soon, some traders began complaining that it didn't
seem like their orders were being completed. Others found that they were getting shares at a higher price
than they expected. The details were unclear on Friday, but on Monday, Nasdaq explained that the trading
delay was due to a "technical error." That's a mild term for what became a huge issue. Following its usual
procedures, Nasdaq started the process that should have led to the stock's first official trade at 11:05 a.m.
Friday. In that process, Nasdaq matches up orders to buy shares with orders to sell.
On Friday, the process fell into an unexpected loop because many traders submitted changes to their
orders before the opening trade began. At 11:30, Nasdaq switched to another system, finally allowing the
exchange to complete the process. Some orders that came in during the switchover didn't go through, or
were filled at an inferior price later in the day. Also, many orders that went through weren't confirmed
until hours later. That left investors unsure about how many shares they bought or sold, and at what price.
The error's ripple effects lasted for days. Facebook's stock ended close to flat in its debut on Friday, and it
touched the $38 IPO price many times during the day. It never fell below that level, leading market
watchers to assume that the underwriters were buying shares to keep the price above water.
Facebook closed at nearly $4 under that level on Monday, the stock's first full day of trading. The decline
continued on Tuesday, though the stock was up modestly in midday trade Wednesday. But Facebook's
final IPO price, $38 a share, gave it a valuation in the ballpark of $100 billion -- a number that many
analysts, ahead of the IPO, repeatedly warned was remarkably high given Facebook's financial
fundamentals.
Totally separate from the Nasdaq issues, there's a regulatory investigation beginning into how Facebook
and its bankers handled sensitive financial information.
A group of Facebook shareholders filed a lawsuit in a New York district court on Wednesday, alleging that
important information about Facebook's financial outlook was "selectively disclosed" to big banks ahead
of the IPO. The legal action followed a Reuters report, which alleges that analysts at lead underwriter
Morgan Stanley received privileged information about Facebook's financials -- information that wasn't
shared with regular folks. Morgan Stanley and three other major underwriters -- Goldman Sachs,
JPMorgan and Bank of America -- reduced their earnings outlooks for Facebook to strikingly similar
levels ahead of the IPO. It's odd that four different banks would cut their estimates to similar sums in a
short timeframe, and it raises the question of whether small shareholders were left out of back-door
conversations. More specifically, the lawsuit alleges that Facebook told analysts at its underwriters "to
materially lower their revenue forecasts for 2012."

But it's still unclear whether those conversations actually happened -- and even if they did, were they
illegal? That's a swampy gray area. Facebook released a statement on Wednesday saying the suit is
"without merit," and Morgan Stanley says it followed "the same procedures for the Facebook offering that
it follows for all IPOs."
The Facebook flop raises some troubling questions about the IPO market. IPOs have been relatively rare
over the past dozen years. The cost of being a public company has risen, and an ample pool of privateequity funds has given owners an alternative source of cash. Many people had hoped that Facebook
would make IPOs fashionable again. Instead, it provided a case study in the perils of going public.
Questions:
1. What went wrong in the IPO of Facebook?
2.

What lesson we can take from the Facebook IPO case?