A Month Later, Fallout from Facebook IPO Persists

Source: CNBC

When Facebook went public a month ago today, the early betting was that it would storm out of the IPO chute and usher in a new wave of tech stock offerings. Some went so far as to compare its impact to that of Google's 2004 IPO .

But Facebook's initial public offering went from an anticipated bump up in price into a dump, and the ripples extended far and wide on the technology landscape. "The IPO was a disaster," says Geoff Cook, chief operating officer of social network MeetMe. "It definitely cooled interest in the sector. It changed the tenor of the conversation."

The chilling effect that Facebook's fortunes could have on other companies eyeing their own IPOs was underscored in a blog post by Y Combinator founder Paul Graham, cryptically called "start-up apocalypse." In it, the head of the company that helps start-ups get a strong financial boost said investors are convinced that Facebook's IPO "will hurt the market for earlier-stage start-ups."

It didn't take long after Facebook's IPO face-plant for many companies to abandon their dreams of going public. This year, 29 companies have pulled their plans to go public. That's level with this point in 2011 but up 53% from this point in 2010, Renaissance Capital says.

"Some people thought the (Facebook) IPO would jump-start the IPO market," says Richard Peterson of S&P Capital IQ. "But it's caused just the reverse."

Many of the companies getting cold feet are in tech: Travel search company Kayak Software and Vkontakte, one of Russia's most popular social networks, quickly delayed their IPOs after Facebook's fizzle.

"It boggles my mind that the IPO of the century turned out so badly," says Greg Tseng, CEO of social network Tagged. "This was supposed to be our (sector's) Google," he says, referring to social media. "If you told me (Facebook) would open at $38 and now be at $28 (on June 6), I would have said you were nuts. … It definitely hurt the perception of our whole industry."

The lineup of IPO hopefuls continues to fade. Just 11 companies in May filed plans to go public, down 66% from May 2011 and the lowest level of activity in the month of May since 2009, during the global financial crisis. The tepid IPO climate might even scotch altogether the hopes of other start-ups, forcing them to consider acquisitions by larger companies such as Google, Apple and Amazon — perhaps even by suddenly cash-rich, post-IPO Facebook.

Making things worse is that Facebook is not alone in disappointing IPO investors. Other high-profile IPOs, especially in the social-networking and Internet industries — including online game site Zynga , online discounter Groupon , online review site Yelp and Internet radio station Pandora — have all faltered and share prices have fallen at least 30% since trading began.

This year, 35% of IPOs priced below their expected price ranges, a strong indication that companies must resort to discounting their shares just to attract enough attention to get the deals done. The number of companies going public at lower-than-expected prices is up from 24% in 2011 and 29% in 2010.

The bigger IPO picture

Entering May, 58 companies had priced their IPOs this year, says Renaissance Capital. That was the best showing since 2000, signaling to some that investors were finally wading back into IPOs after getting burned in that year's dot-com crash. Facebook was supposed to open the IPO floodgates.

An image of Mark Zuckerberg, chief executive officer of Facebook Inc., left, with Robert Greifeld, chief executive officer of Nasdaq OMX Group Inc. remotely ringing the opening bell for trading is projected on a screen at the Nasdaq MarketSite in New York.
Peter Foley | Bloomberg | Getty Images
An image of Mark Zuckerberg, chief executive officer of Facebook Inc., left, with Robert Greifeld, chief executive officer of Nasdaq OMX Group Inc. remotely ringing the opening bell for trading is projected on a screen at the Nasdaq MarketSite in New York.

Instead, Facebook shares were flat on their first day of trading, not showing the first-day pop in stock price that many expected. The deal was mired with technical trading glitches on the Nasdaq stock exchange. But that was just the beginning. Investors dumped shares as fears mounted that they might be overpriced in light of questions about the company's ability tosell ads on mobile devices. Shares of Facebook are down 21% from the initial $38-a-share price.

Lawsuits by disgruntled investors who participated in Facebook's IPO are pending. Investment banks are under fire for not sharing pertinent Facebook information with all shareholders. Nasdaq has apologized and agreed to compensate some brokers for the botched first day of trading.

But more important, the poor debut of Facebook shares has put a pall on the entire IPO market. Not a single IPO has priced since Facebook's deal.

Ironically, perhaps, Facebook may be the sole benefactor of a public offering that weakened the social-media market and undercut possible IPOs, say analysts, developers and venture capitalists. Despite its IPO stumble, Facebook remains the de facto social-networking platform, with more than 900 million users and the $16 billion in cash it raised in the IPO.

With that money, Facebook can develop new products and potentially buy an up-and-coming upstart just as Salesforce.com bought potential IPO candidate Buddy Media, a social-media marketing company, this month.

"There is no vapor trail for others to follow," says Esteban Kolsky, principal at customer-strategies adviser ThinkJar. "But long term, Facebook did a masterful job of raising money, so give the stock some time to settle."

Facebook's long-range plans

For Facebook, the issue isn't so much about its flagging stock price but its long-term plans. The company has the flexibility — unlike many of its peers — to pursue revenue for mobile ads and targeted marketing.

Facebook is in the enviable position of being the center of the social-network ecosystem, where users manage all of their third-party apps, says Gina Bianchini, founder of Mightybell, a new social-networking app for online groups.

"They're doing something right with $4 billion in revenue (in 2011), and they're in good position to build targeted ads," says Jon Elvekrog, CEO at 140 Proof, a technology platform that analyzes publicly available social feeds on Facebook and Twitter.

Because Facebook is so rich in demographic data on millions of people, it could unleash billions of dollars in ads for advertisers that target what consumers say and whom they follow, says Elvekrog.

"It is the largest Internet site in the world, with a strong global reach," says Bill Gurley, a general partner at Benchmark Capital, a backer of Twitter, Instagram, Yelp and others.

Facebook's stock performance doesn't change the fact that social is "the No. 1 online activity," ahead of e-mail and video, Elvekrog says. "A blowout IPO would have set a better mood, yes," but the opportunity for Facebook to capitalize on its audience "is huge," he says.

The company may have some investors worried, but software developers are pumped. "Our brands continue, day-to-day, to be discovered via the Facebook platform," says Christian Taylor, CEO of Payvment, an e-commerce platform on Facebook that is signing 1,500 small and midsize sellers per week and is up to 165,000.

Brian Blau, consumer analyst at market researcher Gartner, says it's all about Facebook's customer base. Developers "are run by boards, who want them to reach consumers and make money. Facebook helps them do that."

Not that Facebook is taking chances. On June 7, it unfurled its own App Center, modeled after Apple's App Store, that gives developers a reason to stick around by helping Facebook members find their apps.

Without an app store, developers might flee to other platforms that aren't connected to Facebook, such as iPhone or Android apps, or apps connected to Google+.

To be sure, Facebook faces severe challenges. Its user growth rate has sputtered in the U.S. Unique visitors to the site in April were 158 million, up 5% from a year ago, the lowest growth rate since research firm ComScore began tracking the data in 2008. Facebook's growth rate was 24% in April 2011 vs. a year earlier and 89% in April 2010 vs. the previous year, ComScore says.

Not only that, Facebook's respected chief technology officer, Bret Taylor, says he is leaving for an unnamed start-up this summer.

Earlier this month, Facebook said it would make it easier for advertisers to place ads on mobile devices. It acquired mobile-commerce start-up Karma and hired the mobile-development team away from Pieceable Software.

Mobile advertising spending in the U.S. is expected to reach $2.61 billion this year, up 80% from $1.45 billion in 2011, eMarketer estimates. For now, Google has about 52% of the market. Apple and Millennial Media, which do not sell mobile search ads as Google does, lag far behind, at Nos. 2 and 3.

Twitter CEO Dick Costolo, meanwhile, says his company generated more advertising revenue from smartphones and tablets than from its website on many days in the past quarter: He declined to provide dollar figures.

Counters Carolyn Everson, vice president of global marketing solutions at Facebook, "We've seen powerful indicators that when people see sponsored stories on mobile, they engage … as much as they do on the Web."

In the end, Facebook's unprecedented scale, technically and in terms of marketing, offers it immense advantages — but only if it learns how to harness it, says Jeffrey Davitz, CEO of Solariat, which helps companies filter and respond to social content. "There has never been a window into that many people," he says.

'Big backlog' of IPO candidates

Meanwhile, Francis Gaskins of IPOdesktop.com says jitters in the IPO market are only temporary. There's a "big backlog" of companies waiting to go public during the summer, and many have the fundamental strength to still attract investors, he adds.

Much of the weakness in the IPO market is due to macro issues, such as the fragile European economy, uncertainty about the outcome of the upcoming U.S. presidential election and a U.S. stock market that has been shaky since May, he says. The Standard & Poor's 500, a measure of large U.S. stocks, teetered dangerously near a 10% correction in early June. If the stock market regains its footing, companies with the best fundamentals can test the IPO market again, says Peterson of S&P Capital IQ.

Companies and their underwriters will just need to lower their expectations for the types of valuations they get, after the nosebleed valuation of Facebook was so soundly rejected, Gaskins says.

Future IPO investors could actually benefit from the damage Facebook's deal inflicted on confidence. With fewer investors clamoring for shares, the investors willing to buy can demand better prices.

"If the (stock market) indexes are stable, we should have quite a few more IPOs when bankers realize they can't overprice them," Gaskins says.

Swartz reported from San Francisco, Krantz from Los Angeles.