Facebook Flop: Take 2

The past couple weeks have been interesting to say the least for the worlds largest social network. The company Facebook (ticker FB) and its publicly traded exchange NASDAQ have had a bumpy ride of late. The latest initial public offering (IPO) of Facebook and the subsequent mess got me thinking about how other recent “tech giant” IPOs have fared in the past few years.

Many investors are fearful when it comes to tech companies going public. This is because of the nature of the companies and how they make a profit. With a traditional firm, such as a manufacturing company, the value of the company is relatively easy to assess. The assets and liabilities are fairly clear and tangible. When a company produces a physical good or tangible services these assets and liabilities, and even sources of revenues, are easy to understand. These companies also have real assets, such as machinery and goods, to sell off in the case of bankruptcy. Tech companies on the other hand often have a technology at the center of their business plan. Frequently this means that the company is not producing a clear-cut good or service, such as Facebook. This makes the company hard for investors to evaluate and stocks often do not fair well on the market when investors have doubt about the worth of the company. This means that tech IPO are often some of the most interesting to watch. While investors may be wary of the risk that a technology company brings, there is a high reward with for tech IPOs that go well. For example, Linkedin and Angie’s List had very successful IPOs. LinkedIn Corp., a popular online professional social networking site, went public on May 19, 2011 and Angie’s List Inc., an online source of reviews for local house repairs, went public November 17, 2011. These stocks went up over 100% and 25% respectively and both enjoyed weeks of success after their offerings. These two companies apparently had the combination of low risk and high reward that had investors excited. Several other recent tech IPOs have not fared as well. Zynga Inc., the online game developer giant, and Pandora Media Inc, the popular online radio, both had mixed success with their respective IPO’s. Zynga lost around 5% on its IPO on Dec 16, 2011. Pandora on the other hand had a positive first reaction, much like Facebook, but by the next Monday trading day had lost 15% from its IPO price set on June 15, 2011. The factors that influence risk and reward perceptions of investors are often hard to uncover until the stock and publicly traded and there is real demand for the stock.

In comparison to other recent IPOs, Facebook’s introduction into the publicly traded domain had mixed results. While early trading was positive, the technical and legal problems Facebook quickly faced as discussed in my previous post pushed FB well below its opening price. It also cost traders millions of dollars in lost investments as they had no idea what was going on with their trades. NASDAQ has now come forward with a plan to handle the situation. This past week on June 6, 2012 NASDAQ announced it would pay a “one time” $40 million payout to compensate investors who lost so much money due to its technical glitches that took place during the IPO. Although the plan is not yet approved by the SEC (Securities and Exchange Commission), it laid out a few types of transactions that would qualify for repayment by the exchange. This primarily included sell orders for at or under $42 per share that did not execute, as well as buy orders priced at $42 per share that were executed but not immediately confirmed. These accommodations by NASDAQ represent the vast majority of the problems experienced by investors and traders during the IPO of Facebook. Additionally part of the $40 million of the plan is the $10.7 million NASDAQ earned as profit on the day of the IPO. Although the process of reconciling the damages of the IPO are far from over it is a positive sign to see NASDAQ put together a compensation plan as quickly as they did to restore the faith of investors in both the NASDAQ exchange and FB.

Currently FB has settled into trading in the upper $20’s, which is nowhere near its initial IPO price of $40. Although many tech IPOs have successful introductions into public markets this does not seem to be the case for Facebook. Even with almost 1/7th of the world’s population online as users of the site, it seems that the initial technological glitches and legal drama have had a long-standing effect on the stock of the company. It seems that it will take a long road of progress for the company to recover from these recent events and returns to the price level many previously expected.

Yahoo! Finance

Stephen Padgett

Stephen Padgett

Stephen Padgett is a current junior at the University of North Carolina at Chapel Hill. He is working toward a BA in Economics and Political Science and plans on graduating early in December of 2012. Although he does not know what he wants to do for his career, he is looking forward to an opportunity with Credit Suisse’s Operations Team this summer in Raleigh.

Financially Stephen grew up in a family that preached saving and living below your means. That, in part, translated to his interest in Economics, especially how economics can affect individuals’ financial lives. Through his financial markets class in the fall of 2011, he furthered this interest by analyzing macroeconomic events. Stephen believes that finance, personal finance in particular, is a subject severely left out when it comes to public schooling in this country, and it is a problem that has manifested itself and contributed to many of the problems seen today. He also believes that education is the key to improvement and hopes that through his writings he will be able help people learn about finance, macroeconomics, and how to be financially savvy for the future.

In his free time Stephen enjoys playing and watching sports, wakeboarding, sailing, and country music. At UNC he has participated in Strive for College, UNC Dance Marathon, and UNC Relay for Life.
Stephen Padgett

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