Facebook Debacle Stands Out in Mixed Year for IPOs

On May 18, 2012, after months of unprecedented hype, the world was waiting in anticipation for social-networking behemoth Facebook (FB) to join the ranks of publicly traded companies, even as some asked why it would want to go public at all.

Associated PressYes, waiting ... and waiting ... and waiting. The scheduled 11 a.m. ET debut time for its first Nasdaq trades came and went -- and trading did not commence. Thus began the fiasco that will forever be known as the Facebook “Faceplant,” an epic tragedy that came complete with tech glitches, botched trades, burned investors and a wave of lawsuits, even as the company added a cool $16 billion to its coffers and earned the title of “Biggest Internet IPO Ever.”

After finally beginning to trade 30 minutes late amid Nasdaq malfunctions and a “fix” that kept some panicked investors and brokers in the dark about their trades for more than two hours, Facebook shares saw a brief pop (supported by underwriters) to $45 before ending the day just 23 cents above the $38 IPO price. Yes, FB investors who got in at that price were slightly better off at the end of the day than they were at the beginning, but the sentiment was clear: After all the buzz, Facebook launched with a whimper, not a bang.

Priced as It Should Have Been?

Meanwhile, the banks that acted as underwriters for the offering and the big investors that put money into Facebook well ahead of its IPO did very well, helping to cement the portrait of the stock market as a rigged casino game with one perpetual winner -- Wall Street.

But had Facebook’s IPO been priced exactly as it should have? As Breakout’s Jeff Macke stated just days after Facebook started trading: “Buying an IPO in expectation of a ‘pop’ is speculating. And speculation has downside risk in addition to potential gains.”  

However, reports emerged shortly after the IPO that underwriters had warned top clients about Facebook’s shaky financial health only days before trading began, apparently following briefings from the company’s executives. And thus began the stream of investor lawsuits against Facebook, the underwriters and the Nasdaq, which later set aside a $62 million pot to replenish firms that lost big on the botched offering. These dozens of pending lawsuits are to be centralized before a federal judge in New York, and Facebook potentially could spend millions in defense money alone.

As for the stock itself, that $38 IPO price has proved a hefty one indeed. Facebook’s poor first-day performance quickly led to investor doubts about the effectiveness of the social network's advertising platform and growth opportunities. With billions of shares hitting the market as various “lockups” expired -- and more still pending -- Facebook shares tumbled all summer before hitting a painful intraday low point of $17.55 on Sept. 4. Online-gaming company and Facebook partner Zynga (ZNGA), which debuted late last year and has been one of the worst performing IPOs of the past 12 months, also sank further amid Facebook's woes. Meanwhile, Facebook CEO Mark Zuckerberg skipped town to honeymoon in Europe with new wife Priscilla Chan.

Today, even as a recent rally has seen Facebook’s stock surge more than 20% in the past month, the shares are still about 30% lower than at their starting point. Will the turnaround last and help close that gap? After an October earnings beat, analyst upgrades and improved sentiment around its prospects, some experts are saying the company could indeed be a long-term buy after all.

While Facebook was the most high-profile IPO disaster of the past year, its performance doesn't even begin to rank among 2012’s bottom five, based on returns on offer price. In fact, according to Renaissance Capital, transportation and materials companies -- not tech -- have been the biggest IPO losers of 2012 thus far, with an average total return of -7.9% and -21%, respectively. See below for the biggest individual losers of the year so far, according to Renaissance.

  Company Ticker Offer First Day Total Return
   

 
Envivio ENVI $9.00 -5.70% -81.30%
Ceres CERE $13.00 13.80% -71.50%
CafePress PRSS $19.00 0.20% -71.40%
Enphase Energy ENPH $6.00 22.30% -54.70%
Audience ADNC $17.00 12.40% -49.40%

The higher-profile losers, such as Facebook and the spectacularly failed BATS exchange debut back in March, as well as 57 withdrawn IPOs, have gotten much of the press attention this year. But there have also been plenty of positive performers among the 124 companies that have priced.

Tech IPOS are up 18% for the year, second only to financials (including housing), which show an average total return of 19%. Software company ServiceNow was the first tech company to debut following the Facebook fallout; it raised $210 million and popped 37% on its first day of trading on June 29. The stock is now at $31, more than 70% above its IPO price of $18. And the second-performing IPO of the year thus far is Guidewire Software (GWRE), which debuted in January at $13 a share and has since seen a return of 140%. See the chart below for more winners of 2012.


  Company Ticker Offer First Day Total Return
   

 
Proto Labs
PRLB
$16.00 81.3% 122.3%
Guidewire Software
GWRE
$13.00 31.7% 121.8%
Nationstar Mortgage
NSM $14.00 1.4% 117.5%
WageWorks WAGE $9.00 40.00% 110.7%
Five Below
FIVE $17.00 55.9% 104.2%

Overall, the 2012 IPO market has, to date, raised $41.4 billion, up 26% from last year’s $32.7 billion. The average first-day pop for the year is at 14%, according to Renaissance, and average IPO returns overall are at 14%, a nice rise from 2011’s average returns of -10%. The housing sector’s successes include top-5 performer Nationstar Mortgage Holdings (NSM), up 109% since its debut. Chuy’s Holdings (CHUY) and Annie’s (BNNY) are two food companies that have seen healthy returns -- 89% and 85%, respectively.

As for the weeks ahead, as Congress attempts to hammer out a “fiscal cliff” deal, it is looking quieter on the IPO front than it was in December of last year, when 18 IPOs ultimately priced. Currently, just one IPO has priced this month and the holiday lull is only days away. The worst December of the decade for offerings was during the height of the 2008 financial crisis, when zero companies priced. Returns came in at a dismal -27% for the year.

It remains to be seen how 2013 will treat the IPO market, but it seems unlikely there will be a debut that comes close to matching the drama of Facebook's.