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Early Facebook (NASDAQ:FB) investors are cursing themselves as the stock continues to fall in one of the most magnificent selloffs in history, but they’re not the only ones hurting from the brutal blow dealt by the disastrous IPO. It’s been less than two weeks since the social network’s public debut, but the world, at least the corporate world, has become a very different place, thanks to Facebook’s folly.
Investing Insights: OMG: Facebook CANNOT Stop Crashing!
Just as the IPO market was beginning to pick up, despite setbacks for companies like Zynga (NASDAQ:ZNGA) and Pandora (NYSE:P), the Facebook flop helped potential investors and underwriters, as well as companies planning to go public, realize their biggest fears. Facebook and its Wall Street advisers, including lead underwriter Morgan Stanley (NYSE:MS), are already being sued by investors who lost some serious cheddar in the $16 billion IPO. Whether claims investors were misled about the social network’s business prospects are proven true has little bearing on how the IPO — the worst in a decade — will be remembered. Wary of being the next big headline, or rather punchline, companies are bailing out of their plans to go public, waiting at least for the fire to die down.
Public companies are also hurting, as the slump has fueled fears of a wider technology bubble. Google (NASDAQ:GOOG) shares closed at $623.05 on the day before Facebook’s IPO. Now they’re trading in the range of $580, despite the fact that Google should be basking in the glow of the Facebook fire, as its Google+ service is a competitor, and the company is constantly jockeying with Facebook to increase the amount of time users spend on its sites.
Unfortunately, like Facebook (NASDAQ:FB), Google relies heavily on advertising revenue. Google’s AdSense has been far more lucrative, with its users eight times more likely to click on its ads than are Facebook’s users. But when markets pull back, they pull back hard, especially when witnessing a collapse of Titanic proportions.
Vkontakte, a social network that out-ranks Facebook in Russia with 119 million users, pulled its IPO “indefinitely.” Founder and CEO Pavel Durov said the Facebook fiasco had “damaged many private investors’ trust in social networks.” Vkontakte is valued at up to $3 billion and had been eying an IPO in 2012 or 2013.
Travel search firm Kayak.com has also put its IPO plans on hold. The $1 billion company was seeking to raise $150 million in a June IPO, but analysts think that’s now unlikely. And Facebook’s ripple effect is being felt beyond the tech world — Graff Diamonds, a high-end jeweler, said that it was pulling its initial offering in Hong Kong, citing “adverse market conditions” that made attracting potential investors difficult.
Of course, Facebook can’t be blamed for everything. Most of the world is still recovering from a deep recession, while economic conditions in parts of Europe have actually worsened. Investors are still seeking safety — something that no IPO can offer. Facebook’s debut confirmed investors’ biggest fears. If a behemoth like Facebook can fall so remarkably short, what’s to be said for smaller IPOs?
Facebook has made an already weak market even weaker. No offerings have priced since its debut on May 18, and as of Wednesday, only one company — Loyalty Alliance Enterprise – was set to go public anytime in the near future.
But is Facebook truly to blame for what’s been happening, or is it just the most salient evidence of an ongoing trend? Subtract Facebook from the initial public offering data for the year to date, and 2012 is still shaping up to be one of the worst years since 2007. Facebook’s $16 billion IPO accounts for more than half of all IPO activity so far this year. Seventy-three companies have priced offerings in 2012, raising $29.1 billion, according to Thomson Reuters.
Earlier this year, private-equity firm Carlyle Group (NYSE:CG) priced below its expected range, while others, like BrightSource Energy and aluminum products maker Aleris, withdrew their offerings altogether. Their fortunes weren’t affected by Facebook’s botched IPO, nor are they the casualties of a tech bubble, but rather they reflect diminished investor confidence in the broader market. Even Apple (NASDAQ:AAPL), a long-time investor darling, hasn’t been performing as well lately as analysts question whether it’s overvalued. After peaking at a record $636.23 on April 9, shares have fallen to the $580 range, hitting a low of $530 on Facebook’s first day of public trading.
Investors aren’t keen on taking big bets right now — they’re all looking for a sure thing, or the closest equities can get to a sure thing. Pricing initial offerings at a small discount isn’t going to cut it. In recent weeks, institutions that buy shares in these deals are demanding progressively more protection against busted offerings, which translates into weaker prices for IPOs, creating a gap that sellers just aren’t willing to bridge.
The Facebook fracas has certainly stirred the pot, but it’s only the “shot heard ’round the world.” Like the shot referred to in Ralph Waldo Emerson’s “Concord Hymn” and credited with beginning the Revolutionary War, the Facebook disaster is only the culmination of escalating tensions — the last straw, if you will.
Mixed metaphors aside, Facebook does have the potential to do some serious damage, but only because of how markets are choosing to respond. Facebook’s fortunes, its business model — none of that has changed. Analysts warned for months preceding the IPO that the company was overvalued, but that didn’t stop overzealous investors from pouring their money into it. Now smarting from a slap in the face, investors are overcompensating, pulling too far in the other direction.
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