Facebook: Overpriced, Overhyped and Overrated!

On May 17th, Facebook stock was priced at $38 per share at the high end of the price offering range. In addition, due to excess demand the number of shares offered jumped 25% from 311 million to almost 400 million shares. This was a classic Wall Street party with the over 25 book runners pushing the stock on the public with the fees in the hundreds of millions. Facebook had a choice between either the New York Stock Exchange or NASDAQ of where to list and trade the stock. Facebook decided to go with the NASDAQ, which is a strictly electronic exchange with no market makers. I am sure this did not go over well with the good old boys at the NYSE.

This was the most highly anticipated IPO since the likes of Visa in 2008 and Google in 2004. The two week road show began in early May with CEO Mark Zuckerburg sporting his hoodie while speaking to well-dressed traders in New York and Boston. Last Monday, the main stream media began with the hype, interviews and special shows all dedicated to Facebook “the social offering.” You could compare this to the Super Bowl pregame show, too long, too much hype and people just waiting for the kickoff.

Typically when an IPO is oversubscribed, only the elite can get IPO shares as these are allocated to clients with the most assets. This leaves most of the investment community and the public having to purchase the shares on the secondary market once it begins trading. The process is sort of a silent auction in the pre-market before the stock opens. If you want to buy the opening price, you must put in a limit order with the maximum price that you are willing to pay. If the stock opens below your bid, you purchase the stock at the open.

So finally on Friday, we were ready for kickoff. Facebook and the NASDAQ had announced that the Facebook stock (FB) would start trading at 11 AM with an indication of the opening price available at 10:45 AM.  I had never seen this type of pre-trade indication for an IPO before and I believe this was the start of the problem. Here is why:

So at 10:45 AM, the NASDAQ put up the initial indication of where Facebook would open at $45. This was sort of a surprise to me and I was a bit disappointed. I had orders in to purchase the stock at higher prices and I immediately cancelled those orders.  I believe the avalanche of cancelled orders by myself and other investors led to a horrible day for Facebook and the NASDAQ market overall. I did keep fraction of my initial orders to purchase just so I could participate.  Here’s where it gets crazy. Once Facebook started trading, my orders were sitting open and unfilled for almost 3 hours.  I did not know how many shares I purchased or the purchase price?  I was told that the NASDAQ was working on a best efforts basis to pair the trades and to check back in 30 minutes. Finally, my orders to purchase Facebook at the open were filled at $42 at 2:30 PM.

Facebook eventually opened at $42 and was immediately sold off eventually closing on the lows at $38. This was certainly not what Facebook, the lead underwriter Morgan Stanley, the NASDAQ or the public expected or wanted.

As I write this on Tuesday, Facebook revenue estimates have been slashed by the lead underwriter’s Morgan Stanley analyst, the stock is trading under $33 and the NASDAQ market site has gone radio silent about what happened on Friday. So much for the most highly anticipated IPO in the last 4 years.