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Facebook IPO case study

Facebook IPO case study. Barbato Fiorella Bottero Federico. Market law and regulation February 28, 2017. Agenda. What is an IPO. What is Facebook and why did it go public. Facebook IPO. The IPO day. Dispute with NASDAQ and lawsuits against Facebook and Morgan Stanley. Conclusions.

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Facebook IPO case study

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  1. Facebook IPO case study Barbato Fiorella Bottero Federico Market law and regulation February 28, 2017

  2. Agenda What is an IPO What is Facebook and why did it go public Facebook IPO The IPO day Dispute with NASDAQ and lawsuits against Facebook and Morgan Stanley Conclusions

  3. Syndicate selection What is an IPO? Preparation • Company chooses the bank/s which will compose the syndicate • Global coordinators: banks that lead the process and are responsible for the deal • Joint bookrunners: banks that participate in marketing and book building • Lead managers: banks that provide only research coverage Analyst presentation and research • Aim: disclosure of all the information, mistakes or omissions are avoided • Prospectus is a legal and a marketing document that must contain facts that an investor needs to make an informed investment • Process: write, approve, publish • Analysts of the investment banks prepare and publish a report that concerns all the information available also in the prospectus • Aim: let investors become familiar with the company • It is not a legal document, it is purely and investor education document

  4. Investor Education What is an IPO? Roadshow and book building • Period of 2 weeks in whichsyndicate analysts go on the road to market their report • Aim: identify the key investors, the initial reaction of the market and the investors’ concerns • At the end of this phase, a price range will be established • Pricing, allocation and closing • Meetings with potential investors that lasts two weeks, the meeting can be a one to one or group meetings • Organised by the syndicate banks together with the management of the company • During the roadshow the banks “open” the book and start collecting orders • Once the book is closed, bookrunners can analyse the strength of demand, and the probability of aftermarket buying/selling • Aim: facilitate a favourable aftermarket performance • At this point, the IPO is closed and the shares of the company are publicly traded

  5. What is Facebook and why did it go public? • Founded in 2004 by Harvard student Mark Zuckerberg • «Facebook is a social utility that connects you with people around you» • An antiquated SEC rule about the number of shareholders • Obtain highly liquid market for investor • Obtain a currency for acquisition • Zuckerberg could sell stocks without voting rights, cashing out while maintaining the control of the company

  6. Facebook IPO • Syndicate selection • Competition in Wall Street, above all between Goldman Sachs Group Inc. and Morgan Stanley • Facebook choice: • Morgan Stanley as company’s primary banker • J.P. Morgan and Goldman Sachs as the other lead banks • Bank of America Merrill Lynch, Barclays Capital and Allen & Company LLC. as co-managers • In the prospectus, there will be a section in which are specified the number of shares underwitted by each bank.

  7. Facebook IPO • Preparation • Company is based in California, so it is subject to the United States prospectus law (Form S-1) • Summary • How Facebook can create value for users • Use of proceeds and dividend policy • Analysis of the industry • Letter of the CEO • https://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm#toc287954_17

  8. Facebook IPO • Roadshow • May 7, 2012 the roadshowbegins • Mark Zuckerberg with his managers recorded a video in which they explain what Facebook is and the reason why Facebook could become an extremely valuable company • David Ebersman (CFO) described the source of revenues and the needed capital expenditures • https://www.youtube.com/watch?v=TyF2UAaMe_E

  9. The IPO day • Given the great success of other internet companies’ IPOs, the Facebook one price was set at $38 • On May 18, 2012, FB stocks were traded on NASDAQ • The price struggled to stay above $38 all the first day • Several technical problems • Only the exercise of the greenshoe option by the underwriters and the above mentioned technical problems “save” the stock price from falling above $38

  10. What happened then • On May 21, 2012, NASDAQ admitted its fault and the stock price fell to $34 • On May 22, 2012, Zuckerberg and the Facebook director Peter Thiel cashed in selling more shares, the stock price continued to fall and closed at $31 • On August 20, 2012, Facebook shares reached the negative peak of 20% • It took an entire year to reach back the IPO price level • On December 20, 2013 Facebook enters S&P500 and the price level was $55 • On February 14, 2014, Facebook announced the Whatsapp acquisition for $bn 19.

  11. Disputes on NASDAQ • As already mentioned, something went wrong from the first day: NASDAQ immediately was suited in court by investors and traders • NASDAQ announced, on June 6, 2012, a “mea culpa” • NASDAQ planned to pay more than $13 million to and provide $26 million of trading discounts

  12. Lawsuits against Facebook and Morgan Stanley • Reuters reported soon after the IPO that Morgan Stanley, received “privileged information” about Facebook earnings and share them only with preferred clients • Reuters reported also that all the global coordinators reduced their forecast about Facebook’s earning of the same amount (clearly odd) • Global coordinators (JP Morgan, Goldman Sachs) were suited for not sharing critical information to the public • Facebook was suited because it did not share with the public the internal revenue projection but just with the coordinators

  13. Lawsuits against Facebook and Morgan Stanley • In 2015, the second US Circuit Court of Appeals, a federal court, stated that Facebook and its CEO Mark Zuckerberg cannot be suited by the shareholders for hiding future plans and prospects. • Morgan Stanley, charged by  Wall Street's Financial Industry Regulatory Authority and  Massachusetts Secretary of State William Galvin of improperly sharing information with preferred clients and not to the public ended in December 2012 with a fine of 5 million

  14. Conclusions • The IPO of Facebook is one of the largest and most innovative IPOs all over the world, the price was set to the highest level of the price range, but some problems occurred • Our intent was to analyse whether the law that regulates the prospectus was infallible, and we showed how in the Facebook IPO it was not applied in the correctly • There was not a total disclosure of the information regarding earnings • Price downfall

  15. Thank you

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