Facebook’s startling free-fall continued Thursday as the three-month lockup period preventing insiders from selling company stock expired. After going public at $38 in May, Facebook shares hit an all-time low of $19.87. Following a massively-hyped IPO, Facebook shares are now down a vertigo-inducing 45% in just three months — even as the index that tracks the NASDAQ, where Facebook went public, is up 20% over that time. The latest Facebook dive came just 90 days after a highly-touted public stock offering that generated massive wealth for company insiders.
As we discussed Monday, Facebook insiders cashed-out to the tune of a staggering $10 billion during the IPO, when the company was worth $100 billion. It is now worth $43 billion. Facebook is the most prominent member of what Wall Street blogger @zerohedge has called Morgan Stanley’s “triangle of IPO terror.” Throughout the last 18 months of the social media tech IPO boom, Wall Street giant Morgan Stanley was the go-to bank for tech IPOs, frequently occupying the coveted upper-left IPO designation that refers to the bank’s lead underwriter status.
The other two companies in Morgan’s Stanley’s ignominious trio are Zynga (down an impressively-bad 68% since going public), and Groupon (down a mind-numbingly awful 80% since its IPO late last year.) All three companies are currently the subject of shareholder litigation. In the wake of each company’s plunge, Morgan Stanley has faced criticism for not pricing these securities accurately.
As the 3-month lockup period concluded Thursday, certain insiders — including Silicon Valley billionaire Peter Thiel, Accel Partners, Greylock Partners, and Wall Street giant Goldman Sachs — were permitted to sell shares. We won’t know for a few days which insiders actually cashed out as the lockup expired, but the company’s 6.3% plunge Thursday — bringing the share-price to a new record low — indicates that someone was doing heavy selling.
After months of telling employees to disregard Facebook’s stock plunge, company founder Zuckerberg acknowledged to his troops earlier this month that watching the swoon has been “painful,” according to The Wall Street Journal. Zuckerberg’s net worth dropped by $600 million Thursday, but considering that he cashed in over $1 billion of equity during the IPO and is still worth $10.2 billion, it’s hard to feel too much sympathy for the newly-married billionaire.
The lock-up that expired Thursday applied only to early Facebook investors who sold stock in the IPO, not employees, including Zuckerberg himself. Employee lock-up expiration dates will occur three times this fall, in October, November (the big Kahuna, with 1.2 billion shares from insiders becoming unlocked), and December, and then again next May. In other words, we could be in for several repeat, command performances of Thursday’s sell-off.
Facebook’s IPO was supposed to be a crowning acheivement for the eight-year-old company, as well as its Wall Street bankers. Instead, it’s turned into an epic debacle that’s reinforced the stereotype that Wall Street tech IPOs are little more than shady gambling dens, rigged for the house and deep-pocketed insiders, with average investors as suckers. It didn’t help that trading was delayed by 30 minutes on the company’s big day, and trades for millions of shares were never confirmed. It was a terrible embarrassment for NASDAQ, prompting one trading executive to brand the debacle “arguably the worst performance by an exchange on an IPO ever.”
(MORE: How Low Can Facebook Go?)
But it wasn’t just NASDAQ’s performance that was “the worst ever.” With Thursday’s stock swoon, Facebook’s IPO now ranks as “the worst performer among all large IPOs on record,” according to data compiled by Bloomberg. That’s quite a designation for what was supposed to be the apex of Silicon Valley’s high-profile social media debuts.
Facebook’s botched IPO has spawned numerous shareholder lawsuits. Irate shareholders have charged that analysts at Facebook’s underwriters, including Morgan Stanley and every other major Wall Street bank — Facebook had no less than 33 participating underwriters — lowered their financial forecasts for favored clients, but neglected to inform the investing public. One lawsuit charges that the company’s IPO documents “were negligently prepared and failed to disclose material information about Facebook’s business, operations and prospects.” Another lawsuit charges that Facebook hid challenges to its mobile advertising business that would have been material information for prospective Facebook investors.
Stock market investors should not harbor any illusions about risky, high-profile technology offerings. This is not Romper Room. Venture capitalists and early employees took big risks, and they deserve to be rewarded. The various offerings raised billions for these companies, and in so doing were successful. As a general matter, stock market investors should not expect sympathy for bets gone bad — unless, of course, securities fraud or other malfeasance occurred, as has been alleged here. But even if no wrong-doing is ever proven, the extreme contrast between the massive insider cash-outs at Facebook, Zynga and Groupon and the shockingly bad performance of each company’s stock makes the IPO process look bad. And that could have a chilling effect on a crucial function of our capital markets — the ability for truly-promising young companies to raise capital from the public.