Egg on your Face-book

To quote from the movie Wall Street (that is, the original 80s version, which I think was the best) “Greed is good”.

That tended not to be quite the case for Mark Zuckerberg and Facebook's IPO underwriters.

From Mark Zuckerberg's point of view, I was not surprised that the share price was hiked and the number of shares was increased up to the final date. But from the point of view of Morgan Stanley (MS), Goldman Sachs (GS) and JP Morgan (JPM) - who should be veterans in reading markets and getting an IPO strategy right - wow, they blew it. This will set the tone in Facebook for a while and unfortunately for the current investors a negative one.

Take a look at this table on other tech IPOs. Facebook's current price, around $31, versus its IPO price of $38 makes for a drop of 18.5 percent. If Facebook were in the chart, it would be the fourth worst result on first day of trading and second worst on result on the week.

And we're only half way through the first week - and short selling has NOT been enabled yet!

This is because to be able to short sell via for example CFD (Contract-For-Difference), it must be possible to borrow the shares from somewhere. This borrowing is made from settled accounts, which settle T+3, equal to Wednesday 23rd and investors will therefore be able to short by Thursday.

How we can interpret Facebook's first days of trading?
I don’t expect Mark Zuckerberg to be particularly worried about the well-being of investors. He has his focus 5-10 years down the road and could not care less about the stock price.

But there's probably a lot of pain among the eager retail investors that who bought into the share at the IPO or at the first day. The less eager but interested investors have probably been discouraged by the hard drop in the price and the following negative media coverage. The potential wave of buying from this crowed has been lost for good.

I see institutional investors as being lukewarm on Facebook. But they are between a rock and a hard place. If the stock goes up and up and they have no shares, then their clients will be furious. But if the stocks tanks then clients will be angry at them for investing in such an expensive company. With the price lower and the sentiment ugly, expect reluctant support. The risk of institutional investors had to chase the stock higher has vanished and as the stock went down with a fizzle.

It doesn't help that evidence is stacking up against the underwriters of Morgan Stanley (MS), Goldman Sachs (GS) and JP Morgan (JPM), who lowered their estimates in the middle of the IPO period. Allegedly they informed institutional investors but not retail clients. Overall it creates questions about Facebook's business model, the ethics of its management and in sum probably makes investors even more reluctant to invest as they will demand higher risk-premiums.

When Facebook enters indexes
Big asset managers like Vanguard, T.Rowe Price and Blackrock have tremendous amount of assets under management which is counted in USD hundreds of billions. For the bigger part of the investments, there is a benchmark which the funds are measured against. The investment managers view their opportunities versus the risk of underperforming the benchmark index. If for example Facebook enters an index and the managers are neutral on the share, then an amount equal to the index weight would be invested in.

But it will take some time before Facebook enters into indices. Facebook should become member of Russell1000 at June 25th and the process of the yearly change begins June 8th. Only the free float market cap (the amount of shares available for daily trading and not locked away by for example founders) is taken into account in the index weight and this is approximately USD 13bn as I write this. I do not have an estimate on the possible weight. The low free float will put a damper on the index size.

Facebook is also expected to enter into the NASDAQ 100 index but this is not until September 1st as the stock has to trade running month plus additional three months. But even though the company has a value of approximately $65bn (when I write this) and could have a weight around the 10th place, as NASDAQ also calculates the index weight on the free float, i.e. the USD 13bn. The weight in the index would move closer to a level of 0.3 percent.

As I read the index terms on S&P500, Facebook is not going to be included. The free float is less than 50 percent and this will hinder an inclusion.

The index buying will therefore take a while to move into gear and is not part of the equation just yet.

Conclusion
The Facebook IPO has definitely left egg on the face on the investment community. The sentiment around Facebook has suffered on the first days and we are all waiting for a bottom on the stock. When that comes there is probably going to be a prolonged period where Facebook management and quarterly reports will have to be stellar before the stock gains some of its shine back. Facebook is playing defence at the moment - French Toast anyone?

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