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EDITORIAL: The Facebook fiasco

Market weaknesses raised by failed IPO

- The Washington Times - Tuesday, May 22, 2012

Met any Facebook millionaires? The country was supposed to be awash in them by now. But unless they are among the privileged few Facebook insiders, investors probably either lost money on the website's initial public offering (IPO) or were smart enough to wait and see. The debut was so poorly handled that financial regulators will soon be looking into it.

For a while last week, it seemed like the Internet boom of the late 1990s had returned. America was seized with the kind of irrational euphoria that quickly made and lost fortunes when the dot-com bubble popped in March 2000. Headlines promised instant riches. Facebook's IPO was spring-loaded to soar. U2's Bono, an early investor, would be richer than the surviving Beatles. Facebook was going to be such a strong opener that it would boost the entire sagging market. So said the hype.

Others predicted a political game-changer. Michael Mandel of the Progressive Policy Institute speculated in the Atlantic that the "Zuckmentum" from the IPO might spark a "sudden acceleration of growth and job creation fueled by the smartphone/communications boom" that it could be a boon for President Obama's political fortunes and trouble for Mitt Romney. Alas, the "App Economy" still awaits. If a billion downloads of "Angry Birds" hasn't saved the Obama presidency, Facebook won't either.

As of market close on Tuesday, the stock had suffered three down trading days and is well below its IPO price of $38. This isn't a total shocker. Facebook was priced at the high end of its projected value, and 122 times its earnings. More established tech stocks like Microsoft, Apple and especially Google, which is seen as a direct competitor, are priced between 10 and 20 times earnings. By those standards, Facebook should be trading under $10. Shortly before the IPO went live, General Motors dropped Facebook advertisements - a major source or revenue - citing poor return on investment. Since the company was offering no new products, innovations or features, the main argument in favor of the investment seemed to be simply the fact that it was Facebook.

Add in Nasdaq technical glitches, sales that didn't go through, sales that went through that shouldn't have and a mysterious last-minute cut in revenue forecasts from lead underwriter Morgan Stanley, and there are all the makings for an ugly investigation. On Tuesday, Securities and Exchange Commission (SEC) Chairman Mary Schapiro said after a Senate banking committee hearing that while "there is a lot of reason to have confidence in our markets and in the integrity of how they operate ... there are issues that we need to look at specifically with respect to Facebook." Regarding the abrupt cut in revenue forecasts, Financial Industry Regulatory Authority (FINRA) Chairman Rick Ketchum said, "The allegations, if true, are a matter of regulatory concern."

As it stands now, most of people who will make money on Facebook are the insiders who crafted the deal, and the farsighted outsiders who bet against it. All other investors are simply waiting for the right time to defriend the stock that was supposed to save the day.

The Washington Times

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