In February 2004, a huge social media revolution was born in the Harvard dormitory room. It was the brainchild of Mark Zuckerberg, Eduardo Saverin, Dustin Moskovitz, and Chris Hughes. Little did they know, that this small tech company will garner over 2 billion subscribers by 2018. It didn’t come as a surprise that people were eagerly waiting to hold their stake in this company, whose future prospects seemed crystal clear; constant growth and increasing revenue. The market sentiment, much before the IPO was clearly very positive.
Seven years ago, the social media giant, Facebook launched it’s Initial Public Offering (IPO), on 18th May 2012. Mark Zuckerberg initially, resisted and resorted to all possible ways to keep Facebook private. This was seen when he turned down offers by Viacom and Yahoo to buy out the company. However, the company did accept small investments from other companies, like Microsoft and Digital Sky Technologies, which purchased a larger share than Microsoft at a lesser price.
The company had to go public majorly because of a ruling of the Securities Exchange Commission, which said that any private company with more than 500 shareholders of record, must follow the same disclosure requirements as public companies. When Facebook crossed this 500 shareholders mark, it was not considered practical, to adhere to stricter regulations without raising funds by becoming public. The company as of 31st December 2011 had 845 million monthly users and 483 million daily users.
The company thus went public at $38 per share, wanting to raise $5 billion, making it the largest IPO in tech history.
Was it successful? Many said that Facebook’s IPO was the worst handled, as it was able to raise only 23 cents in the initial days, compared to LinkedIn, which doubled in the first few days itself. This was not taken in a good stride by many, given the sky-high expectation the public had with this social media giant.
However, many investors felt they have bought overpriced security, as Facebook’s share price soared for almost 14 months after the IPO. In September 2012, the crisis was at its peak when the price came down to less than half i.e. $17.55.
Also, ironically the tech giant’s IPO was said to be filled with technical glitches. The stock market trading at the U.S. usually began at 9:30 a.m., however, on that day, Nasdaq exchange didn’t start trading even till 11 a.m. Finally, at 11:30 a.m., the trading started which was quite intense and fast. It was reported that 80 million shares exchanged hands in the first 30 seconds. However, the next day many investors submitted changes in their orders. But these orders were mixed up, weren’t confirmed till a long time, leading to a lot of uncertainty regarding what has been bought or sold and at what price.
The investors were unable to sell their shares on the first day of trading, leading to a huge accumulated loss day by day as the prices were plunging continuously.
This emerged into a giant wrangle, and people who suffered losses started demanding compensation from Facebook, and many lawsuits were filed because of the same. This led to the market share price falling adversely. The stock lost almost $50 billion in value by August 2012 itself.
One of the reasons sighted for Facebook’s IPO price being called overpriced was, General Motors just a few days before Facebook going public announced that it will withdraw its advertisements on Facebook, which was worth $10 million. This decision was taken as General Motors realized that these advertisements were ineffective in raising the company’s sales. This led to a loss in revenue of Facebook, deeply impacting its market share price.
However, many consider it not as a fiasco, but rather a success. The company was established in 2004, surviving during the downturn economy and strict regulations, and coming out with an oversubscribed IPO after 8 years, while the other tech companies failing severely, is nothing but a sign of achievement.
Facebook’s IPO was still considered optimal for its employees and investors. In 2015, it emerged out as the 12th largest company by market capitalization of $271.74 billion. Thus, the IPO, cannot be called a complete blunder after all.
Aftermath: As the IPO was said to be disappointing for the majority of the investors, this lowered the market sentiment for the other tech companies. It has become harder for the other social media companies, wanting to raise money by going public, especially startups. This also strained the relationship between Facebook and NASDAQ. This fiasco maligned the image of the exchange and the lead underwriter of Facebook, Morgan Stanley as it had overvalued the shares of Facebook, and had underwritten more shares than required. But nonetheless, investors of Facebook after 7 years, are positive about the growth aspects of the acquirer of WhatsApp and Instagram, with increasing subscribers, technology and average daily time spent by users.