Post IPO Facebook: What Went Wrong?

As the price of Facebook shares plummets further from their 38 USD debut price to 29.40 USD on 29 May 2012, the fate of the social networking giant is in serious jeopardy, as various market experts’ state. Before Facebook made its debut, I had written a blog post suggesting, like many others, that this social networking company too can head the Groupon way – it too suffered like Facebook is suffering now.

What now? This is the question Facebook share buyers and market trend commentators are pondering.

Facebook IPO – What Went Wrong?

  • Wrong Revenue Model

Few days back, I read online that the reason why Facebook IPO cannot succeed as Zuckerberg had envisaged because there is no surety about its revenue model. Hours after the IPO was announced, General Motors (GM) came forward saying they plan to stop investing in Facebook advertisements because “they don’t work” and here GM is talking about an investment worth 10 million USD.

Facebook Analysis from Trefis.Com

Further there were many reports claiming that the revenue system of Facebook is at fault and that their advertising system is not enough for companies to generate revenues.

  • Slapped With Lawsuits

Along with its IPO debut, Facebook is slapped with many lawsuits where the major grievance of the share buyers is that the company and its underwriters, Morgan Stanley, didn’t reveal the exact business prospects of Facebook.

I believe that this is one of the main reasons why its share prices are seeing this slump. Till date the social networking giant has been able to rake in more than 16 billion USD but if the situation is not remedied, the now publicly traded company will come into serious problems.

Detailed Lawsuit against Facebook

Morgan Stanley has refused to comment on this accusation and according to Facebook spokesperson, these lawsuits are baseless. Claimants have said that the company and the underwriter withheld information about its revenue and thus, the share buyers had to suffer financial losses.

If these allegations are proven true, tough times lay ahead for Facebook. Currently, the State of Massachusetts, the Senate Banking Committee and the Securities and Exchange Commission are investigating the company. Professor Stephen Diamond, law professor at the Santa Clara University and a financial market expert, states:

“If there’s material misstatement or an omission of material information by Facebook, then they have violated the federal securities law. It appears that in this case, the reports are that the CFO, David Ebersman, had significant control over the process, but of course, that doesn’t let Mark Zuckerberg, the CEO, off the hook, he’s Ebersman’s boss, and he controls the company. It’s a black eye for Silicon Valley,” Diamond said. “There are a lot of other companies that were hoping or planning to go public in the wake of this IPO. The impact of Facebook’s valuation will impact the value of those businesses. This has ripple effects right across the Valley, inside the technology community and in the surrounding community.”

According to me, Dr. Stephen’s words summarize the current circumstances aptly. If Facebook has misappropriated revenue statements, they should shoulder the blame.

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