The Facebook IPO Dilemma

By on June 24, 2012
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Something went wrong with Facebook’s recent IPO

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There has been a lot of talk lately regarding Facebook going public… And rightly so. The company’s share has fluctuated enough for everyone to understand that share prices may not always be priced right. Is it too over-priced or is it giving the investors a run for their money by selling for too less?

Honestly, I didn’t think it would be so complicated, especially when you have Morgan Stanly running the books. But then again, as it turned out, the investment banks shared information with selected few that they didn’t do with the public. They say that such communication falls within their legal rights. And then I am reminded as to why fundamental analysis in trading is significant to understand that securities are not always priced right. A little prudence is not too much to ask I suppose.

And now Securities and Exchange Commission (SEC) is in the picture. Something went wrong with Facebook’s recent IPO. As with any underwriter, it is always desirable to keep the prices steady when an initial offering takes place. And they did so. The shares went public for $38 last month, and as of now, it is trading at around $33. What does this tell you? Was the stock priced too high at its start?

Rep. Darrell Issa (R-Calif.), a U.S. House of Representatives committee chairman has voiced his concerns (on behalf of the House Committee on Oversight and Government Reform) by writing to the SEC. “The investment banks were given almost 80 years to enjoy this flawed law, fraught with conflicts of interest and incentives to misprice shares. Among other things, I ask that you take advantage of the vast improvements in communications technology to protect investors while unleashing capital formation to strengthen our economy.” said Issa.

Specifically, he asks to reconsider the Securities Act of 1933. The act provides a structure on how all the IPOs are managed. The act facilitates underwriters & issuers to “exercise substantial discretion” in instituting the IPO price. When you have discretion over information that may well be valuable, and at the same time share ‘privileged’ information to selected few, it does raise caution. It’s an unfair advantage over individual investors.

Now that the offering has already taken place (and done with), I hope Facebook keeps acquiring companies that will contribute to its growth. Judging from the past, it has not been hesitant in making acquisitions. And the kind of companies they acquire show what types of services they plan to change or update. Instagram. Lightbox. Hot Potato. Rel8tion. And recently, Face.com. These and hopefully more in the coming days will be essential to understand the future of the company – and of course, the investors’ faith.


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