Investors who have large losses after buying shares at Facebook listing are some classic suckers for Wall Street, as no attention was needed to notice significant problems with the IPO, according to the Wall Street Journal (WSJ). “If you are one of the shareholders who sue Facebook because the social network and the underwriters revealed changes in analysts’ forecasts only to small part of investors, then you should receive compensation for your loss or transactions to be canceled, if the allegations prove to be true. However, this not mean that you are not a Wall Street sucker,” the U.S. daily writes. During the preparations for listing, there have been many “dubious aspects,” notes the newspaper.
On May 15, listing price climbed to $38 from a range that had the minimum set at $28. The next day, the volume of shares available for sale by public offering was up by 50 million. A notification was later sent that the main investors in Facebook will sell 53%, or 84 million, more shares than originally planned. “There is still a great interest in Facebook trading. But warnings indicated a strong retreat: people with inside information and long-time investors were selling Facebook maximum of shares at the highest possible price,” the publication writes.
Making the most of the investment in Initial Public Offering is not new. The stock decline on the first day of trading is not a problem as long as the company has growth prospects and there is sufficient public interest to hold at least the listing price. At the time of listing, Facebook was about to become a company with a market capitalization of 100 billion dollars and a ratio of about 100 between price and earnings per share. On April 23, Facebook reported that revenue fell 6% in the first quarter, and profit by 32%.
There were also other warnings. General Motors has pulled its ads from Facebook, saying that they do not bring them benefits. Companies have also shown skepticism about advertising on Facebook before. Even the social network admitted that half of the companies with ads on Facebook considered their advertising on the site experimental. In other words, while underwriters were promoting the public offering and were increasing the price and the number of shares sold, Facebook admitted that the period of strong growth, which could support a very high price, was over.
The good part is that none of this information was hidden, reports WSJ. Facebook notified of the concerns about advertising. It informed about the business downturn and almost admitted that there will not be an evolution similar to Google after its public offering in 2004. Thus, while underwriters, led by Morgan Stanley, were bringing the price up and increased the number of shares sold, there was sufficient information indicating that these decisions were misleading. The information was made public by Facebook, and analysts at Goldman Sachs and Morgan Stanley have used it to reduce forecast.
If Morgan Stanley and Goldman Sachs warned only hedge funds and other investors that it expected for Facebook to be not as good as expected initially, then this is a serious violation of rules. Even though brokers had a duty to properly inform everyone, investors must take some responsibility themselves. Facebook shares closed Friday at $31.91, down 16% from the listing price one week before, at $38. Stock markets are closed today in U.S. for Memorial Day.
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