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Judy Loy: Facebook Does a Face Plant

by on June 03, 2012 7:15 AM

What do a college student and the CEO of the largest IPO issued in history have in common?

They only wear hoodies.

Mark Zuckerberg, who is 28, made No. 35 on Forbes Magazine’s list of World’s Billionaires with a net worth of $17.5 billion. The young Facebook CEO showed up to an important Roadshow meeting with Wall Street types just days before his company went public in his signature hoodie rather than a suit and tie.

In the ‘hoodie heard round the world,’ this was only a small part of the hype and hoopla surrounding the social networking juggernaut’s IPO, or initial public offering.

Let’s go through the highlights and lowlights that is Facebook.

Let’s start with the basics. Facebook is a phenomenon. There is no doubt about that. Zuckerberg started his firm in 2004 while he was still a student at Harvard University along with three fellow Harvard Students.

If you want to know all the sordid details, they were fictionalized in the 2010 movie, “The Social Network.” What was Zuckerberg’s take on the film? “I just wished that nobody made a movie of me while I was still alive.” Suffice to say in 2012, the only person left standing and noted as the ‘founder’ of Facebook is Mark Zuckerberg, the current Chief Executive and Chairman.

Facebook went public on May 18 and was issued on the NASDAQ market, where an overall trading debacle ensued. The issue price was $38, valuing the company at approximately $81 billion and making it the third highest IPO-valuation in history. It has been downhill from there. As of this writing, the shares were priced at $27.43 after hitting a new low of $27.21.

The reality is that Mark Zuckerberg did not want to take his company public. In the IPO filing, he stated, “Facebook was not originally created to be a company. It was built to accomplish a social mission—to make the world more open and connected.”

The SEC has a rule that, put in simplest terms, says if you have over 500 shareholders, they require you to go public. Facebook was there. However, Zuckerberg did protect himself. There are two classes of company stock. The public shares issued on Friday have one vote each. The shares Zuckerberg and early investors own have 10 votes per share. Zuckerberg may only own 18 percent of shares but he controls 57% of the votes. He still holds the reins.

The latest issue hitting the newly minted stock is a class-action lawsuit by investors alleging that material information was withheld from retail investors.

A report from Reuters claimed the lead underwriter Morgan Stanley (the company with the primary directive for organizing an initial public offering), informed larger investors that it had lowered sales forecasts on the company just a few days before it began trading while keeping the rank and file investors in the dark.

This prompted the lawsuit which claims the Facebook prospectus (a document that discloses material facts – financial, properties, etc. – to potential buyers) omitted material information about the company’s financial projections.

Morgan Stanley allegedly botched the IPO but that does not mean that they didn’t make money. Their split of the $170 million in underwriting fees is just the start. Morgan sold more shares of Facebook than it had (a common practice for underwriters called over allotment).

Typically, they cover this because the IPO agreement with Facebook says they can buy additional shares below the IPO price. In this case, they merely bought in the open market when the stock dropped, pocketing even more dough and leaving the retail investor in the dust.

Going forward, the biggest hurdle facing Facebook is profitability. Yes, it has made money from ads and games on its site. However, more and more eyes are moving toward mobile devices. Facebook has yet to effectively make money on its mobile applications. It is harder to play the games or show ads and still have the content easily read by the user.

Thus, Facebook has a list of headwinds to overcome: mobile profitability, a disastrous IPO issuance and an investor lawsuit. Who knew a company that has been public less than a month could create so much news and controversy? Yet, that is what makes life and investing interesting.

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Judy Loy, ChFCâ, is a Registered Investment Advisor and CEO at Nestlerode & Loy Investment Advisors, State College, Pa. A graduate of Penn State University, Loy has been with the firm since 1992, assisting clients with retirement planning, brokerage services and investment advice. She can be reached at jloy@nestlerode.com.
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