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Buffett: Facebook Was Wrong Price or Handled Badly

http://www.bloomberg.com/video/buffett-facebook-was-wrong-price-or-handled-badly-Nx0oXWNSTNGfWNF_JKe6kg.html

Be Wary of IPOs. It's Probably Overpriced.

Do you think you can make lots of money by getting in on the ground floor of the initial public offering (IPO) of a company just coming to market?

My advice is:

• that you should not buy IPOs at their initial offering price and 
• that you should never buy an IPO just after it begins trading at prices that are generally higher than the IPO price.  

Historically IPOs have been a bad deal.  In measuring all IPOs five years after their initial issuance, researchers have found that IPOs underperform the total stock market by about four percentage points per year.  

• The poor performance starts about six months after the issue is sold.  
• Six months is generally set as the "lock up" period, where insiders are prohibited from selling stock to the public.  
• Once that constraint is lifted, the price of the stock often tanks.

The investment results are even poorer for individual investors.  You will never be allowed to buy the really good IPOs at the initial offering price.  The hot IPOs are snapped up by the big institutional investors or the very best wealthy clients of the underwriting firm. 


If your broker calls to say that IPO shares will be available for you, you can bet that the new issue is a dog. 

• Only if the brokerage firm is unable to sell the shares to the big institutions and the best individual clients will you be offered a chance to buy at the initial offering price.  
• Hence, it will systematically turn out that you will be buying only the poorest of the new issues.  
• There is no strategy I am aware of likely to lose you more money, except perhaps the horse races or the gaming tables of Las Vegas.

A Random Walk Down Wall Street
by Burton G. Malkiel

Facebook lessons: What not to do when planning an IPO

Facebook lessons: What not to do when planning an IPO

Written by Reuters Friday, 25 May 2012

NEW YORK (May 25): It's been less than a week since Facebook went public, and while the initial public offering (IPO) made CEO Mark Zuckerberg and many others very wealthy, the botched way in which the offering was done has sparked investigations, lawsuits and regulatory threats. It has also sparked a lot of anger toward the social media company, lead underwriter Morgan Stanley and the Nasdaq stock market. 

Here is a list of eight things that went wrong with the Facebook IPO — a "what not to do list" for the next big TECHNOLOGY [] company considering a public listing, compiled from interviews with investors, traders, analysts, attorneys and regulators.

1. Charge too much. Facebook raised the price of its shares above a reasonable valuation given its earnings and revenue. The US$38 (RM120) price tag was 100 times historical earnings. By comparison, Apple Inc trades at 14 times historical earnings, while Google Inc is at 19 times. Facebook set the higher price despite a slowdown in recent months in its online advertising business and its concerns about the growing use of mobile devices, an area in which its advertising revenue is still weak.

2. Sell too much stock. Facebook floated 421 million shares worth around US$16 billion at the offering price — the biggest ever US technology company IPO. As soon there were some wrinkles, supply overwhelmed demand. Many bankers were especially concerned that Facebook demanded that a larger than usual block — about 25% — be set aside for ordinary investors, who typically are more willing to flip their purchase in the hope of a quick profit. "The underwriters misjudged the amount of buy and hold demand relative to the amount of speculative demand," said Jay Ritter, a finance professor at the University of Florida, in Gainesville, Florida, who plans to hold on to the 400 shares he bought in the IPO.

3. Fall for the hype. Facebook, Morgan Stanley and others believed the hype — some of it self-generated — that the company's shares would pop 30% to 50% on the first day of trading, and miscalculated the demand. The event was "a perfect storm", according to J Robert Brown Jr, a law professor at the University of Denver Sturm College of Law in Denver, Colorado. Facebook increased the number of shares at the last minute while bad news was coming out. Then delays in the start of trading on Nasdaq and later disruptions in matching buy and sell orders "gave some shareholders time to reconsider and cancel their orders", Brown said in an email. "All of this resulted in less demand and a dropping share price."

4. Selective Disclosure. Even if Morgan Stanley and other underwriters didn't do anything illegal, they weren't upfront about what they knew about the company and whom they told. Morgan Stanley and at least three of the other underwriters lowered their forecasts for Facebook's second-quarter and full-year revenues — but the bad news reached only a small group of big clients. Smaller investors had no idea until the figures were revealed by Reuters several days after trading had begun. The company and Facebook have denied any wrongdoing, but regulators and lawmakers in Washington have opened inquiries and reviews, and some shareholders have sued Facebook and Morgan Stanley. "The main underwriters in the middle of the road show reduced their estimates and didn't tell everyone," said Samuel Rudman, a partner at Robbins Geller Rudman & Dowd, which brought the lawsuit on Wednesday. "I don't think any investor in Facebook wouldn't have wanted to know that information."

5. Have a distracted CEO. Some investors are asking whether Zuckerberg was on top of the whole process enough, given the many thousands of investors who were about to buy a slice of his company. He appeared in New York City at the company's investor road show in his trademark hoodie, failed to appear at some other road show events, and declined to hold a ceremony at Nasdaq's main New York City site in Times Square for the listing debut. He was also busy planning his nuptials — his wedding to long-time girlfriend Priscilla Chan occurred one day after the IPO.

6. Don't plan for the worst-case. Nasdaq CEO Robert Greifeld partied last Friday with Zuckerberg while the bell was rung at Facebook's Silicon Valley headquarters to kick off trading — but at just that time, a major crisis was brewing back east at Nasdaq's sites. Technical glitches delayed Facebook's debut by 30 minutes, and many buy and sell orders for hours afterwards. Nasdaq said on Wednesday that it made the wrong fix for a technical glitch, worsening the initial problem. The exchange now faces big claims for compensation from traders. "If we had known that our solution was inadequate, we would have fixed the solution with the right solution before moving forward," said Eric Noll, Nasdaq's head of transaction services. The US Securities and Exchange Commission (SEC) is now reviewing the matter, and at least one lawsuit has been filed accusing Nasdaq of negligence.

7. Avoid the Google road. Facebook sold its shares through a traditional Wall Street IPO — which is a more subjective process because it's managed by the investment bankers. By contrast, when Google went public in 2004, it issued stock through a more transparent — and democratic — process known as a modified Dutch auction. Underwriters gathered bids from investors regardless of their connections or size of their portfolios.

8. Alienate your customers. For a company that transformed the meaning of the words "like" and "friend," the events of the last week weren't so friendly. The biggest US automaker, General Motors Co, said only days before the IPO that it would stop buying ads on Facebook. The decision followed Facebook's failure to convince GM about the benefits of Facebook in a meeting in recent weeks, people familiar with the meeting said. Then the IPO problems managed to upset thousands of investors who are also Facebook customers. In a sign of the image problems it has created, the headline on one New York Post column on Thursday was: "Warm, Fuzzy Vultures", and a cartoon in the same newspaper depicted a distraught bull slumped over a computer featuring a Facebook page thinking the worst — "unfriend, unfriend, unfriend, unfriend, unfriend". — Reuters

Facebook flop hurts small investors’ trust in stocks

May 26, 2012

Pedestrians walk near the Nasdaq Marketsite at the start of the listing for Facebook in New York May 18, 2012. — Reuters pic

NEW YORK, May 26 — Just when brokers thought Mom-and-Pop investors were getting excited about the stock market, along came Facebook.

The 17 per cent plunge in Facebook’s shares since its ballyhooed debut last Friday, coupled with Nasdaq’s mishandling of opening day trading, is spooking the very investors who had seemed the most intrigued by the offering, said Wall Street executives.

“The Facebook IPO is another in a series of data points that feed concerns that the financial markets are not a safe place to be for individual investors,” said John Taft, chief executive of Royal Bank of Canada’s US wealth management division, one of 33 underwriters of the offering.

Brokerage firms have been fighting to restore investor confidence in the markets since the financial crisis of 2008, but trading volume has remained stubbornly weak. Market-shattering events such as the Flash Crash of 2010, the Bernard Madoff scam, last summer’s downgrade of US government debt and the European sovereign debt crisis have been pushing investors out of equities into cash or bonds that yield near-zero returns.

Anticipation of the Facebook IPO had created a stir of public interest in the offering and in stocks in general. Now, its failure is expected to drive more retail investors away from stocks and further depress trading volume, which lowers revenue at brokerage firms.

Investors poured US$33.5 billion (RM100 billion) of net new money into US stock mutual funds in the first quarter, according to Thomson Reuters Lipper. In the last three weeks, however, they pulled out US$16.3 billion.

“The Facebook flop didn’t help,” said Jeff Tjornehoj, Lipper’s head of Americas research.

“The perception was that something good was going on,” said Anthony DeChellis, chief executive of private banking Americas at Credit Suisse, which also had a small portion of the Facebook underwriting. “It could have gotten people interested in the next IPO, but the conversation now is, ‘You owe me because of Facebook.’”

The Facebook IPO had plenty of problems. The company increased the size and price of the issue just before the debut, and it later emerged that numerous analysts had cut their growth forecasts for the company — without telling retail investors.

One result was that despite pre-IPO chatter about a scarcity of shares, too many retail investors got a piece of the Facebook action, brokers said. Trading in the IPO last Friday made up 40 per cent of daily volume at discount brokerages, up from two per cent to five per cent historically for IPOs, according to analysts at Sandler O’Neill & Partners. So-called retail investors lost an estimated US$630 million in the first four days of trading.

New headlines showing that even Wall Street insiders got pummelled by the Facebook debut have stoked further doubts among small investors. At least four of the trading firms chosen by Nasdaq to make markets in Facebook lost a total of more than US$100 million because of systems issues in the electronic marketplace, according to one of the firms.

“It’s disheartening and very scary,” said Victoria Phibbs, a day trader from Jacksonville, Florida, who canceled an order for 400 Facebook shares through her Charles Schwab Corp brokerage account as she watched the price plummet on its opening day of trading. She learned in the evening that her order was nevertheless filled, leading to a US$1,000 loss as she sold the shares. Schwab, she said, reimbursed her commission costs.

“It’s not like when our parents used to trade,” she said, recalling a time when investors could be confident enough in the markets to buy and hold stocks for the long term. “I feel like you can’t win as an individual investor.”

Spokespersons at Nasdaq did not respond to calls for comment. A Schwab spokesman said the company has resolved most of its clients’ Facebook-related issues.

Brian Cabral, a United Airlines pilot from Topsfield, Massachusetts, ordered 100 Facebook shares through a discount broker last Friday during a layover on a flight from Tokyo to Washington, then quickly cancelled the order.

He received a “cancel pending” notice within minutes. But more than six hours elapsed before he received word that the cancellation went through, a notification he said typically takes five to 10 minutes.

“I think these types of shenanigans will dissuade people from investing in the stock market,” said the 50-year-old pilot. “You’re not going to see my generation really coming back to this market.”

RBC’s Taft said the Facebook systems glitches are particularly harmful to restoring confidence. “You can imagine the feedback we’re getting from brokers and clients,” he said. “You should be able to trust that your buy and sell orders are being filled in a timely manner.”

The securities industry is concerned that the extended drought in stock investing will continue to erode its bottom line. Trading commissions at retail brokerage firms dipped nine per cent in this year’s first quarter from a year earlier while cash balances and investments in low-yielding bonds are at unusually high levels. “Credits” reflecting cash at securities firms have grown 32 per cent in the 24 months ended February 28, according to regulatory reports.

Balances in margin accounts — a profitable lending product for brokers and an indication of investors’ risk appetites — are 10 per cent below last April, according to analysts at Goldman Sachs.

The hit to brokerage firms’ bottom lines from reduced trading has been cushioned by the growth of fee-based advisory accounts and the recovery of the broad market from the depths of the financial crisis, but brokerage executives said distrust of the markets and trading remains a problem.

“Investors are still spooked,” said Taft, a former chairman of the Securities Industry and Financial Markets Association, the US brokerage industry’s principal trade group.

That Facebook blew up after weeks of anticipatory headlines is proving to be an object lesson to retail investors.

“There is an incredible amount of empirical evidence that retail investors should not be buying IPOs,” said Henry Hu, a securities and finance professor at the University of Texas Law School. “Insiders always know more and the pricing is incredibly subtle.”

The apparent mispricing of Facebook shares by underwriters and the deal’s large float give the impression that Wall Street enjoys “squeezing every dime out of investors’ pockets,” likely hurts Facebook’s ability to sell future offerings and exposes the company and its underwriters to litigation, he said.

IPOs are subject to Section 11 of the Securities Act of 1933, which sets higher standards of due diligence than other antifraud provisions of the securities law. “Section 11 is promised land for plaintiffs’ attorneys,” said Hu, who was the first head of the Securities and Exchange Commission’s division of risk, strategy and financial innovation.

SEC Chairman Mary Schapiro told reporters Tuesday that there is still “a lot of reason to have confidence in our markets and in the integrity of how they operate,” but one of her predecessors was less cheery.

“It’s an event with long-lasting negative implications for an industry that can ill afford this kind of blemish,” former SEC Chairman Arthur Levitt said in an interview. — Reuters

Psychology of Initial Public Offers (Understanding the IPO of Facebook)

IPO  .... It's Probably Overpriced.

The full version.

Will You Buy Facebook, the Largest IPO of All Time?

Are you ready for the largest IPO of all time? Well, you'd better be.  No matter what you choose to do with the decade's hottest IPO, you deserve as much information as possible. 


But there's more than one way to value an IPO. Most of us are more interested in how much value that initial offering places on the entire company. By that measure, Facebook is head and shoulders above General Motors and every other "biggest" IPO that's come along in recent years:



We know Mark Zuckerberg started the site at Harvard in February 2004. Now, 99 months later, it's worth $100 billion. That's an incredible amount of value to create in a relatively short time, but I didn't truly appreciate how outsized that valuation was until I compared it to these former IPO champions and the length of time each took from founding to reach the IPOs that earned them so much.



How did Facebook's tech peers begin their public lives? In every case (even Google's), far more humbly:

Apple and Microsoft were '80s kids, debuting in 1980 and 1986, respectively, but they represented high-water marks for high-tech interest in their days.

If you'd like to think that Apple was more reasonably valued than Facebook at their respective debuts, you're wrong. Facebook's IPO valuation is actually in line with many of its high-tech peers, including two that didn't wait for profitability before going public:

With the benefit of hindsight, we can see that most of these companies were bargains at the time, and continued excellence has brought early shareholders some amazing gains:

With the exception of AOL, which has fallen on some hard times of late, and Amazon.com, a longtime high-valuation stock, major tech companies that survive the ravages of age have all seen their valuations shrink and their gains explode. Google, with the least growth of the bunch, has still been a six-bagger for IPO investors. Apple has earned its earliest investors 290 times their initial investments, while Microsoft has a cumulative return of more than 33,000% since going public.

Is there anything left to "like"?

For those of you expecting huge returns from Facebook, here are a few sobering numbers to consider -- assuming, of course, a $100 billion debut that isn't pumped to the moon by rabid demand. For your investment to offer Google-like returns, Facebook would need to be worth more than $600 billion, a market cap no company has held for very long. To approach even Yahoo!'s post-IPO growth, you'd need Facebook to be worth more than $2 trillion. And to become the next Microsoft in terms of share-price appreciation, Facebook would have to someday be worth $3 quadrillion dollars. Good luck with that.

Perspective is important when considering the growth prospects of any hot IPO, and Facebook's public debut will demand it. Do you believe that Facebook can be the next Google, AOL, Apple, or Microsoft? I don't.

http://www.fool.com/investing/general/2012/05/16/will-you-buy-the-largest-ipo-of-all-time.aspx

Facebook, Twitter used in US stock fraud

October 06, 2010



Facebook and Twitter feeds were used to allegedly defraud the investing public. — Reuters picNEW YORK, Oct 6 — Facebook and Twitter social networking sites were used to tout stocks in a classic “pump and dump” fraud of about US$7 million (RM21.7 million) that was uncovered during a cocaine-trafficking probe, US prosecutors said yesterday.

Investigators discovered the fraud in a two-year probe of suspected trafficking by longshoremen and others of 1.3 tonnes of cocaine worth US$34 million through the Port of New York and New Jersey officials said.

A statement by the Manhattan US Attorney’s office said 11 out of 22 people charged used more than 15 web sites, Facebook pages, and Twitter “feeds” to “defraud the investing public into purchasing stocks that were being manipulated by participants in the conspiracy.”

A spokeswoman for Twitter declined to comment on the announcement. A spokesman for also Facebook declined to comment.

Eight longshoremen and three others face narcotics trafficking charges. Eleven people, including one longshoreman, face charges of conspiracy to commit wire fraud in the purported stocks scheme.

Documents filed in Manhattan federal court said the 11 were from New York, Florida and Pennsylvania. They are accused of orchestrating web site links that touted picks in four penny stocks said to be based on the authors’ expertise and independent research.

They face up to 20 years in prison if convicted.

None of the stocks were identified in court documents, which said more than US$3 million was accrued in illegal gains by the accused and that shareholder losses amounted to more than US$7 million.

The case is USA v. Susser et al, US District Court for the Southern District of New York, No. 10-mag-2190. — Reuters