Facebook withheld material info before IPO

Facebook

We covered Facebook’s strategy on Mobile advertising and Search initiatives here a couple of weeks ago, and why we felt Facebook (FB) stock bump up to 22 was temporary. As of today, FB is back below 20, and those Put Options mentioned in the post are looking quite good. Yesterday, there’s a real damning article on Bloomberg on how FB actually withheld material information in the days leading up to its IPO. The article itself is long and very detailed, but worth a read if you own FB stock or are generally interested in the company. It also includes actual correspondence between FB and the SEC at various stages leading up to the IPO.

 

If you want a quick read, here is a condensed synopsis –

 

1) FB touted the effectiveness of ads linked to customers’ friends, citing a Nielsen report on Feb 1, in its filing. When the SEC asked for proof, it withdrew the statement.

 

2) The battle between FB and the SEC lasted about 3 months from that point until the IPO. At every stage, information about its business was not forthcoming.

 

3) Only 8 days before the IPO did FB release a statement that mobile users were increasing at a faster rate than advertising growth. Today, 600M out of 1B users access FB from their mobile phones. The ability to advertise and monetize the mobile user base is limited. This is not just a FB problem, its a problem for all social media sites that depend upon advertising. Nobody has found the OptionEDGE of monetizing mobile.

 

4) On May 17, FB priced its IPO at $38 per share, at a multiple of 107 times trailing 12-month earnings. By comparison, Apple (AAPL) and Google (GOOG) are between 12 and 25. This made FB more expensive than 99% of all the S&P 500 companies.

 

5) FB filed its final amended prospectus only a day before the IPO on May 16. Admittedly, they included all the mobile data and many of the material facts that the SEC wanted. By this time, retail interest in FB was its peak. Analysts on TV were talking things up, expecting it to pop to 50 or 60. Meanwhile insiders and institutional investors who had gotten notice of the data were getting ready to dump their shares if they could legally do so, and many of them could.

 

6) SEC has this whacky rule that filings will be released to the public only 20 days after the IPO. (Go figure !). They don’t post it real-time. By the time the SEC got this report out, the stock was already cratering

 

7) At first, FB said it receives 12% of its revenue from Zynga (ZNGA). Later it admitted the number was 19%. SEC also got FB to warn investors that Zynga may lure FB users away to other platforms, which FB agreed.

 

There’s plenty more to chew on – especially the specific correspondences between FB and the SEC. Investors should be aware that all is not well. Almost 2B shares could potentially hit the market this quarter from key employees restricted stock. There could be a lot more downside to FB.

 

4 Comments

  • Ellem

    Reply Reply November 23, 2012

    Have you written a piece yet on money megnaament? In particular, I’ve been looking around at other traders’ blogs to see who is talking specifics about what their expectations are, percentage-wise, of monthly and annual profits and what size pile of capital they depend on to make a living as traders.

    • Hari Swaminathan

      Reply Reply December 6, 2012

      Ellem, pls check Module V – its all there

  • Tim

    Reply Reply December 1, 2012

    No surprise

  • Joe

    Reply Reply December 4, 2012

    i don’t doubt it, they are scumbags. they left us holding their crappy stock.

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