Facebook Investor Spending Month’s Salary Exposes Hype

May 24 (Bloomberg) -- Erik Schatzker reports on how pricing was set for Facebook's IPO. He speaks on Bloomberg Television's "Inside Track." (Source: Bloomberg)

Ryan Cefalu, who lives with his wife and two kids in Baton Rouge, Louisiana, saw in Facebook Inc. (FB)’s much-anticipated initial public offering a chance to buffer his retirement fund. His expectations fizzled along with the stock within the first minutes of trading.

“It’s disheartening to know that things get over-hyped,” Cefalu, a 34-year-old data-systems manager who spent about $4,000 on the stock, said in an interview. “That’s about a 12th of my annual income -- so a month’s salary. I’m trying to do an on-my-own retirement kind of thing.”

Facebook, a site used by 901 million people, allocated more than 25 percent of shares to retail investors, said two people familiar with the offering who asked not to be identified because the process was confidential. That means the value of stock bought by that group for $38 in the IPO has dropped by at least $630 million in total, based on the closing price of $32 yesterday and assuming investors held the stock.

While asset managers and hedge funds got to buy the stock in private trading years before the IPO and investment banks made money in the offering, smaller investors had to wait until last week’s IPO for a piece of the action. The outcome: After Facebook and its underwriters misjudged demand in pricing the IPO and glitches on the Nasdaq hampered trading on the first day, the world’s largest social-network website lost 18 percent in three days. The shares are still about 13 percent under their $38 IPO price after paring some losses.

Photographer: Scott Eells/Bloomberg

Pedestrians walk past the share price for Facebook Inc. displayed at the Nasdaq MarketSite in New York on May 21, 2012. Close

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Photographer: Scott Eells/Bloomberg

Pedestrians walk past the share price for Facebook Inc. displayed at the Nasdaq MarketSite in New York on May 21, 2012.

The stock rose 3.2 percent to $33.03 at 4 p.m. in New York today.

‘Should I Bail?’

Facebook, the biggest technology IPO in history, turned into a quagmire of blame. Buyers of the stock sued the company, Nasdaq OMX Group Inc. and the underwriters, claiming they were misled. The U.S. Securities and Exchange Commission and the brokerage industry’s watchdog both said they may review the offering, and the scrutiny prompted Morgan Stanley (MS), the lead underwriter, to defend its handling of the IPO in a statement.

“I thought it would be fun to get in on the initial frenzy,” said Linda Lantz, an online marketer in Granite Bay, California, who bought 100 shares. “Now it makes me think ‘Oh god, should I bail or is it going to come back?’”

For Cefalu, whose children are age 12 and 1, the first-day glitches meant more than a bad day of trading: they made him buy twice as many shares as he intended after an order he canceled went through hours later, he said. With shares of Zynga Inc. (ZNGA) slumping along with Facebook, he estimates he lost a combined $2,250 as a result of the Facebook debut debacle.

Photographer: David Paul Morris/Bloomberg

A television technician checks monitors displaying Mark Zuckerberg, chief executive officer of Facebook Inc., inside a satellite truck in the parking lot at the company's headquarters in Menlo Park, California on May 18, 2012. Close

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Photographer: David Paul Morris/Bloomberg

A television technician checks monitors displaying Mark Zuckerberg, chief executive officer of Facebook Inc., inside a satellite truck in the parking lot at the company's headquarters in Menlo Park, California on May 18, 2012.

Technical Problems

Michael McClafferty, a freshman finance major at Michigan State University, saw his “first big investment” turn into a $3,000 loss when he sold the shares at $35.

“I didn’t want to lose more,” McClafferty said. “I didn’t know what to do.”

The 19 year-old student estimates he spent $8,000 more than he wanted to while repeating orders that wouldn’t go through on the first day, and failing to cancel them because of the technical problems.

“I didn’t know what happened,” he said. “Then I was like, ‘they should be able to do something about it.’ They messed up pretty big from what I see, and it hurt more people than just me.”

Retail Investors

On its debut, the Menlo Park, California-based website jumped to $45 at the start of trading, which was delayed 30 minutes, before ending the day up 0.6 percent at $38.23. It paled in contrast with Google Inc.’s 18 percent jump in its 2004 initial public offering, Visa Inc.’s 28 percent gain in 2008 and LinkedIn Corp.’s 109 percent surge last May.

“The reaction of the retail investor is ‘Wow, what a flop,’” Jay Pestrichelli, co-founder of the Omaha, Nebraska-based investment adviser Zega Financial, said in an interview.

Frustrations of individual investors were exacerbated by a snafu at the Nasdaq, where trade confirmations were delayed and some orders may have been mishandled. Nasdaq’s woes were felt across the brokerage industry, according to Fidelity Investments, the second-largest mutual fund company.

Some customers who purchased Facebook stock “may have experienced delays in status updates,” Fidelity said in a statement. “This is an industry-wide issue that affected many different broker-dealers and other market participants.”

Fidelity Customer ‘Concerns’

Boston-based Fidelity said it’s working with other brokerage firms to “get Nasdaq to come to a resolution that addresses the concerns of our customers.”

Joseph Christinat, a spokesman for Nasdaq, declined to comment. Larry Yu, a spokesman for Facebook, declined to comment.

Facebook increased the number of shares sold and the price range days before the IPO, raising $16 billion and valuing the company at $104.2 billion.

Pat Brogan, a Yahoo! Inc. manager who trades on sites run by E*Trade Financial Corp. (ETFC) and Fidelity Brokerage in her spare time, called the experience of buying Facebook stock the “biggest fiasco” in her 30 years of day trading.

“They flooded the market with so many shares,” Brogan said. “I’m actually going to dump them if they get back to $38.”

Demand from retail buyers was higher than normal for Facebook, with personal investment website Sigfig.com seeing 10 times more orders than it had for other recent technology IPOs, said Terry Banet, chief investment officer for the site.

“Facebook wanted to get more retail involvement and they succeeded,” Banet said.

‘Obvious Gamble’

Some investors managed to take advantage of the initial gain. James DiMaggio, a 29-year-old product line sales manager at Ametek Inc. in Morton, Pennsylvania, said he bought 200 shares at $38, sold half for $40.98 and made about $280.

“The other half is now tanking,” said DiMaggio, who estimates his losses so far at $320. “It was really exciting in the beginning. I don’t gamble, and this is obviously a gamble.”

In the wake of the stock’s losses this week, small-time investors took to the Web to express their agitation on sites including Twitter Inc. and online investing community StockTwits Inc.

“There’s a lot of questioning about the IPO process in general and a sentiment that the real investor is getting taken by the larger Wall Street,” said Phil Pearlman, executive editor of StockTwits.

Some investors still see potential in the long term. At Sigfig, 7 percent of users who bought Facebook on May 18 sold it the same day, below the 15 percent to 31 percent first-day flipping of stock that has been more typical of recent technology IPOs, according to Banet.

Long-Term Potential

“Short term fluctuations don’t bother me,” said Charles Landry of Sacramento, California, who bought 1,000 shares on May 18. “Facebook has the potential to be, in the long term, one of the iconic companies in Silicon Valley, a la Google, a la Apple.”

Renee Morrison, who runs accounting at Empyrion Wealth Management in Roseville, California, had never bought a stock in her life before investing in Facebook last week. She too plans to wait it out, she said.

“I have been very well educated and prepared that it’s kind of like gambling, there’s no guarantee,” Morrison said.

To contact the reporters on this story: Danielle Kucera in San Francisco at dkucera6@bloomberg.net; Douglas MacMillan in San Francisco at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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