Gradually, as the information starts to come through, it is becoming increasingly clear that the flotation of Facebook will likely be a catalyst and symbol for everything that does not work on Wall Street.  It is an issue that deeply divides analysts as this IPO was based more on hope and faith in the ability of the social network to increase their revenues and profits in the future rather than a sound financial history.

Mystery Surround the Pricing of Facebook Shares

The mystery that surrounds the Facebook share pricing issue remains. It was obvious that there were some underlying assumptions that gave the Facebook offering a sense of what is now seen as delusional optimism.  Facebook is ultimately responsible for the price issue and the information that they published prior to the IPO.   The stock market has to assume they chose their analysis independently, and in fact Morgan Stanley was statutorily required to perform due diligence on behalf of the syndicate which had underwritten the Facebook initial public offering.

The Unequal Treatment of Individual Retail Investors

One of the basic principles of capital markets is the equality of all shareholders. The principle dictates that investors, whether retail or institutional, should be treated fairly in the allocation of stocks in an IPO.  However, the Facebook IPO does not outwardly appear to have stayed with that principle.

The Wall Street Journal tells the story of an investor – a retiree from St. Louis who bought Facebook shares online on the first day of trading.  He bought around three thousand Facebook shares valued at $42.03 and ended up losing about 12%, which amounted to something like $30,000 US Dollars.

Was There Preferential Treatment?

What actually happened between May the 11th and the 21st?  Did some institutional investors and hedge funds traders get preferential treatment from Facebook’s syndicate? A large institutional investor (Capital Research and Management) on the basis of some ‘inside information’ and its own independent analysis, concluded that the second quarter results from Facebook (FB) would be quite disappointing. They informed Morgan Stanley that they wanted to reduce their IPO subscription, furious that banks would still increase rather than decrease the IPO issue price of the Facebook stock.

The Lack of Transparency of the Syndicate

How shares are distributed now needs to be far more transparent in the future.  It is likely that there will be a shareholder backlash against Facebook in the future due to this lack of transparency because there are many who suffered losses both because of how the first 82 million shares were awarded, and then due to the failed Nasdaq implementation of opening-day trading.  Don’t be surprised if there are class-action suits here.

What It All Down to Just Plain Old Fashioned Greed?

Once again, the lure of money ($300 million in commissions for banks and $10 billion for some of the existing shareholders), the relationships, information inefficiency, and a general lack of transparency that led to this situation.  If shares had been set at a more reasonable price, it would have been a successful IPO with credit to the creators of the world’s largest social network which brings together 900 million people from around the world.  As Business Week wrote, Facebook’s IPO has seriously increased mistrust for individual investors.

Sign Up For a Wall Street Journal Student Subscription: If you would like to keep your finger on the pulse of all things relating to the Facebook IPO and are currently studying at a college or university, then you should consider signing up for a WSJ Student Subscription.  The Wall Street Journal Student Edition has up-to-date news, views, analysis, as well as in-depth information on how you can plan for your career once you graduate.

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