Facebook IPO Under Investigation

The Facebook IPO was a flop with too many shares being issued at too high a price. The underwriter, Morgan Stanley is under investigation for allegedly providing inside information to some of its clients, enabling them to dispose of their holdings in the overvalued stock and make large profits. 

The inefficiency of the banking system has been widely criticised in the press and this scandal adds to the long list of complaints. Investors only recently expressed their outrage at Bob Diamonds excessive multi-million pay package at Barclays and the banks have continued to hold back on lending to small businesses despite benefitting from cheap loans provided by the ECB. 

The Facebook fiasco sums up the inefficiency of the stock market. Most ordinary people can clearly see that the Company is likely to be overvalued at 65 times its current earnings. Facebook’s revenues are too small in comparison to its market capitalisation to the point where it will be extremely unlikely that investors will receive sufficient dividends to generate a reasonable return on their investment. Facebook already has 900 million users and is already at the mature stage of its life cycle meaning that further growth will not be easy to come by. Few users click on the adverts on the website and several large companies including General Motors have withdrawn their advertising campaigns due to concerns over the low conversion rates via this medium. 

Given that most people with any basic knowledge of the markets understood that Facebook is likely to be overvalued, the question is who invested in the IPO in the first place? We believe bailed out banks and people who are not investing their own money to be the most likely investors. Readers would be advised to review their pension funds to establish whether they have invested in Facebook and suffered the immediate 13% write down in their investment following the IPO.