Wed, Oct 24, 2012 - Page 9 News List

How Facebook’s social networking dominance failed to monetize

In May, Mark Zuckerberg was worth US$20 billion. Last month, that figure had fallen to US$9 billion. What went wrong?

By Tim Adams  /  The Observer, LONDON

Even by the time Zuckerberg and Chan were on honeymoon in Rome, a post-mortem on the IPO and share price, which had by then fallen almost US$10, was underway. It was already being talked of as the most disastrous IPO in history and the first lawsuits had been filed. Major fund managers laid the blame with the decision, in the week before the IPO, to increase the number of shares being sold by 25 percent and to raise the asking price from a range between US$28 and US$35 to one between US$34 and US$38. A US$100 billion valuation had a convenient headline ring to it.

At the same time, a hardening rumor persisted that those closest to the deal were party to more information than regular small-time investors. By May 23, shareholders had filed five lawsuits against Facebook in New York and California. That number quickly swelled to about 40. On June 1, three small Facebook shareholders — David Goldberg, Kevin Hyms and Garrett Garrison, who had invested retirement funds and lifetime savings — filed a class action suit against Zuckerberg and his company. Court records detailing their case argue that Facebook had been less than forthcoming about the fact that in the weeks leading up to flotation there had been a downgraded forecast of revenue, which had caused some analysts, even those at Morgan Stanley, to revise down confidence in the company — information only allegedly shared with major investors. Facebook and its underwriters strongly refute these allegations. The case, which will be heard on behalf of perhaps thousands of IPO believers, moms and taxi drivers among them, will also draw on evidence from the US Securities and Exchange Commission about Facebook’s apparent reluctance to release some key data — notably the way it counted mobile users and the revenue it generated from them — even when pressed to do so.

Andrew Goldenberg, one of the attorneys representing Goldberg, Hyms and Garrison, described how the three men came to his office “confused and frustrated and angry ... They are not sophisticated investors,” he said.

Nearly 200 others followed that trio and are now part of the claim.

“They all tell the same story,” Goldenberg said. “They feel cheated. You are talking about an unprecedented loss after five months for this kind of high-profile IPO. Hype drove it and that is fine. But you can’t do that on the basis of incomplete information. They feel it is another example of the citizen being taken advantage of by these banks and big corporations.”

Where money has been lost on such a scale, conspiracies abound, but two key reasons for the freefall of the stock price, which quickly lost half of its value, seem to have existed in plain sight. The first was the timing of an announcement by General Motors, which the day before the IPO made the decision to pull all advertising from Facebook, suggesting that, having looked hard at its numbers, it had no clear evidence that advertising on the site was effective. The second, perhaps more fundamental, explanation for the market’s pessimism lay in the rhetoric of Mark Zuckerberg.

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