Facebook’s first IPO range was near fair value
Facebook, which has lost more than $19 billion in market value since its initial public offering, told regulators before its debut that the proposed price range reflected the fair value estimated earlier this year.
The Menlo Park, Calif.based company set a proposed IPO price range of $28 to $35 a share on April 25, based on a projected fair value of $30.89, according to newly released correspondence with the U.S. Securities and Exchange Commission.
Facebook raised $16 billion in the May 17 IPO, the largest ever for a technology or Internet company. Since then, shares have tumbled on concerns that ad revenue growth won’t keep pace with surging membership as more users access the site on mobile phones. Filings show the SEC also questioned Facebook about its ability to generate revenue from mobile ads.
“Facebook has more complex and also unproven and questionable ad products,” said Rebecca Lieb, an analyst at Altimeter Group in New York, in an interview. “It’s not something really understood by the industry, much less the SEC.”
Chief executive Mark Zuckerberg, who co-founded the social network in 2004, increased the price range and expanded the amount of shares on offer prior to the sale.
Facebook sold stock at $38, the top end of its revised range. That price made Facebook more expensive than almost every company in the Standard & Poor’s 500 Index. Since then the shares have slumped more than 20 percent, battered by concern over Facebook’s growth prospects.
“Why did they bring it to $38?” said Dan Veru, chief investment officer at Palisade Capital Management in Fort Lee, N.J., in an interview. “The bankers miscalculated supply and demand, and shouldn’t have based it on retail demand. They brought it so far above fair value.”
At the time of its debut, underwriters led by Morgan Stanley set a price that valued Facebook at 107 times reported earnings in the past 12 months, more than every S&P 500 stock except two. The company’s own estimates of its fair value in 2011 ranged from $25.54 in March of that year to $30.07 in September, Facebook told the SEC. The fluctuations were caused in part by speculation about the timing of the IPO in the media and investor speculation over the company’s financial performance, Facebook said.
Facebook didn’t discuss fair value with the SEC after April 25 and had its final correspondence with the SEC on May 15, according to documents. The same day, Facebook increased its price range to $34 to $38.
“We responded to all SEC comments over the course of this correspondence, and the SEC declared our registration statement effective on May 17,” Facebook said in an e-mailed statement, adding that releasing SEC correspondence is customary.
Documents also showed that regulators pressed Facebook’s executives to provide more detail on how users’ shift to mobile devices would affect its profit. On May 9, Facebook amended its IPO filing to say that its revenue might suffer as more users accessed the site on mobile devices rather than personal computers.
“Assuming that the trend toward mobile continues and your mobile monetization efforts are unsuccessful, ensure that your disclosure fully addresses the potential consequences to your revenue and financial results rather than just stating that they ‘ may be negatively affected,’ ” the agency wrote to Facebook on Feb. 28.
That month, the SEC also asked Facebook for more information on the extent of Zuckerberg’s power at the company, including his “ability to designate a successor, and the implications of being a ‘controlled company.’ ”
The IPO valued Facebook at $90.9 billion, including common stock and vested restricted-stock units.
Also, Facebook asked a court to consolidate more than 40 shareholder lawsuits over losses related to the company’s IPO. Some of the suits include claims that investors lost money when Nasdaq OMX Group failed to process orders correctly.