In the "This Is Why We Can't Have Nice Things - Tech Bubble Edition," Facebook is now facing the prospect of massive and multiple lawsuits over its rapidly plunging IPO.
Facebook's $100 billion IPO was considered the largest in tech history, which probably should have been a sign to a group of investors who were alive and sentient during the first tech crash in the late 1990s and alive and more than sentient during the housing bubble in 2007 that it was overvalued.
Unfortunately, American economic theory posits a 1:1,000,000 growth:health ratio, meaning that all growth is good growth, and the more of it, the better. Especially in the midst of a sluggish economy, something like Facebook takes on an almost heroic kinesis: this, finally, is the company whose growth will save us. And that is how bubbles form, even when we should know better.
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In Facebook's case, there is now speculation that the company, along with its financial advisors Morgan Stanley, misled investors. Separate lawsuits in New York and California allege that Facebook knew about reduced revenue forecasts and concealed it from investors, inflating the initial price of the offering.
Via the Guardian:
The problems began on 9 May, when Facebook amended its IPO prospectus with a short and, for some, difficult to interpret reference to the fact that while its usage on mobile phones was growing exponentially, the company was finding it harder to sell advertising on its mobile website than on "desktop" pages. In other words, revenues were not keeping pace with the growth in users.
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Worse, Facebook may have communicated this reduced revenue prospectus to some investors, leading Goldman Sachs (those guys!) and others to sell immediately upon the public offering, which precipitated the fall in the stock. Again via the Guardian, which is better at this nonsense than PoliticOlogy:
The actions of Facebook's underwriters days later gave no hint of the information they were receiving from their own number crunchers. On Tuesday 15 May, the range at which they estimated the float would be priced was pushed up from between $28 and $35 to between $34 and $38.
A day later, the insiders and early investors who had invested in Facebook during private funding rounds increased the number of shares they planned to sell during the IPO by a massive 25%.
Goldman Sachs decided to sell nearly half its holding, while Manhattan hedge fund Tiger Global increased its sell-off from 3m to 23m shares. Those most likely to have seen the analysts forecasts may have decided that the shares were unlikely to enjoy the customary day one surge, seen when Google and professional networking site LinkedIn went public. Basically, for those in the know, at $38 a share Facebook was a "sell".
When considered with JPMorgan Chase's loss of $3 billion in proprietary trading two weeks ago, FB's stock plungeroo is the second example of financial mismanagement that, if you close one eye, sure looks like financial malfeasance. What a good thing we just went through a massive economic downturn to teach us all a good lesson about fiscal recklessness.
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