Facebook IPO – A Tale of Caution

Oct. 2, 2012 - PRLog -- At this price, the firm is trading at about 40 per cent discount to its offer price, yet, at about 47 per cent, its price earnings ratio is still very high. What went wrong?  This is the question that Cass Professor, Meziane Lasfer explored during a presentation hosted by the Capital Club Dubai, the region's premier private business club and a member of the ENSHAA group of companies.

Drawing on his research on the different complexities of valuing initial public offerings (IPOs), as well as on the factors such companies can use to signal their quality, Professor Lasfer identified a number of possible reasons for the price decrease.

The first was the influence of investor sentiment. He stated that, similar to the burst of the dot-com bubble or the housing market collapse, the release of Facebook's IPO was met with a marked and alarming level of overconfidence by both investors and insiders.

Investors were also overly credulous, simply following the herd and succumbing to the draw of "the opportunity of a lifetime" to acquire a "can't-miss" investment that they believed was destined for easy gains. With these sentiments in place it is easy to see why investors treated Facebook as "worth buying at any price".  The unfortunate result of this type of situation is that investors overpay and end up holding losing stocks, and most often they further compound their losses by refusing to sell in order to avoid admitting their mistakes.

Another factor Professor Lasfer discussed is the lock-up expiry date which usually causes a decrease in stock price. However this can't explain the whole of Facebook's bad share performance as the lock up expiry date is limited to just one day while Facebook shares have continued to spiral. Other 2011/12 IPOs have not performed well in the market, however, some big names such as LinkedIn saw share prices double.

Professor Lasfer discussed the effects the behaviour of investment banks have on IPOs, commenting that the underperformance of so many new IPOs may be due to the inability of these banks to impose discipline on issuers' price demands. He stressed that the impact of the perceived loss of credibility that banks have suffered since the advent of the financial crisis must not be overlooked.

In the case of Facebook, he suggested, underwriters may have purposefully overpriced the IPO knowing that growth would not reach the levels that were expected, so pursuing a strategy of raising the offering price and targeting more shares for the individual investors, who remained in the dark.

Finally he related the poor performance to Facebook's lack of full disclose regarding its future growth. As a result the market was nervous - this kind of lack of information disclosure usually leads to a decrease in share price.

Professor Meziane Lasfer joined the Business School (http://www.cass.city.ac.uk/) in 1990. He has written extensively on Corporate Finance, Capital Markets and Corporate Governance issues.  Professor Lasfer was the Director of the MSc Finance programme (http://www.cass.city.ac.uk/courses/masters/courses/finance), the PhD programme, and acted as Director of Research. He teaches Corporate Finance, Financial Analysis, Research project Management and Financial Economics to MBA, MSc and PhD students (http://www.cass.city.ac.uk/courses/phd).