Monday, 28 May 2012

Web 2.0 Comes of Age..Or Does It? NASDAQ:FB fizzles.

It was supposed to be the golden moment of the new Internet Age. No tech bubble--we were going to get it right this time. Investors were more sensible now, and knew how to value web-based companies which had finally figured out how to monetize. The stage was set, and we would come out of the gates all guns blazing.

Pffft. Seriously? There are a few times that Wall St. drinks its own Kool-Aid on a macro level (re: housing crisis, tech bubble, S&L crisis, etc.), but by and large, it is good at weeding out singularly irrational events. Not this time.

Even the lead up to IPO was suspect. After months of speculation that Facebook would have to settle below the psychological $100B mark, underwriters unexpectedly boosted the issuance by 85M shares to 420M, and raised the expected range to $34-$38, tipping the valuation into nine-figure land; it raised a few eyebrows that the decision was made in the middle of a roadshow, but the changes were pegged to increased interest by PMMs. Then, GM withdrew $10M of ads, citing insufficient marketing value, echoing Morgan Stanley's own consumer IT analyst who projected declining revenue. The decision stoked fears about long-term profitability as Q1 2012 profits actually declined from Q4 2011 levels. 

On the big day itself, the debut was delayed by half an hour, trades were unexpectedly cancelled and then filled at lower prices hours later, and news that many institutional investors were flipping their allocations spooked the market. It is estimated that Morgan Stanley spent close to a billion dollars propping the price above the IPO level of $38. FB then went into freefall the next day, and mom-and-pop investors lost millions (retail investors had over 20% of the issuance, an unusually high number). It remains below $38.

All told, however, the decline is indicative that underwriters maximized value for insiders--a first-day pop is cited as evidence the IPO could have been priced higher. Mark Z. is now worth over $18B--he married college sweetheart Priscilla Chan this weekend, presumably delaying for favorable tax purposes. And while concerns remain over making money from the move to mobile and cracking the China market, analysts remain optimistic, with the median 1-yr estimate at $44 (the 21 underwriters aren't allowed to issue reports until the end of the lock-in period in 45 days). Maybe we'll get it right this time around.

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