The Facebook IPO hype: a rude social awakening

This case is available at ECCH with reference no. 112-052-1.

Facebook, the world's largest social network, became a listed company in May 2012. The meteoric rise of Facebook from a Harvard student dorm into a billion-users platform has fascinated everyone around the globe. Markets had been engulfed with excitement for over a year ever since rumours began to circulate of the company’s planned Initial Public Offering (IPO). In essence, Facebook’s conversion from a much sought after private entity into a public firm has been shaped by numerous factors. Lack of credit on favourable terms combined with Facebook’s compensation policy as well as the desire of a couple of influential shareholders to exit their investment prompted the firm to consider an entry into the stock markets. Despite hiring highly reputed and experienced underwriters to facilitate this transition, a series of missteps by several stakeholders encouraged the firm to introduce its shares at an indefensible price. Facebook chose an issue price based on market fads and an alarming level of investor and insider overconfidence; it ignored the estimates suggested by its own valuation models. Further, the company’s frequent and discouraging amendments to its filings with the Securities & Exchange Commission (SEC) eroded the much desired shareholder confidence.

This case study describes the benefits and drawbacks of going public, what the IPO process typically entails and the role that underwriting investment banks take up. We highlight various elements that led to the failure of what has been one of the most hyped-up IPOs ever. Besides discussing the role of various agents in this fiasco, the case reflects on how simple rationale got overridden by the most seasoned titans in the IPO market. In addition, this case delves upon the valuation methods and assumptions that were used by the underwriters to justify an appropriate offer price for the Facebook stock.

The Facebook IPO hype: a rude social awakening

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