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Inside Story Americas
Facebook IPO: Fair risk or casino capitalism?
As the stock offering creates big winners and losers, we ask if the odds are stacked against main street investors.
Last Modified: 26 May 2012 12:26

The social networking site Facebook's Initial Public Offering (IPO) on the NASDAQ stock exchange, has been referred to as one of the most hyped technology stock market offerings.

"If you know that a stock is overpriced and everybody knew this ... you know you are taking a risk there. You don't have any right to a stock that goes up rather than down."

- Felix Salmon, Reuters business blogger

The popular site boasting 800 million active users, sought to capitalise on its popularity but since the launch of its IPO, its stocks have tumbled by around 15 per cent.

Mark Zuckerberg - the founder of Facebook - along with the investment banks that organised the launch, Morgan Stanley, JP Morgan and Goldman Sachs have pocketed billions of dollars.

Those investment banks all cut earnings estimates for the social network in the days leading up to the NASDAQ launch. But they only disclosed these changes to certain favoured clients.

So the average main street investor had no idea that the company they were about to buy into was not expected to live up to over-hyped expectations.

"There is a chance here that this was just pure insider trading, the insiders made a lot of money and those who didn't have the information lost out."

- Russell Mokhiber, editor of Corporate Crime Reporter

The company's IPO created some big winners and big losers, with ordinary investors having lost at least $630m collectively. Morgan Stanley and other underwriters have made about $100m in profits so far, plus $175 million in fees, according to the Wall Street Journal.

Some of these profits will likely be offset because of problems associated with the IPO. However, owners of Facebook stock who sold shares during the IPO, netted profits of some $16bn.

Several lawsuits have been filed by Facebook shareholders against Facebook, its founder, and Morgan Stanley and other banks.

A Facebook spokesperson told one media outlet, "We believe the lawsuit is without merit and [we] will defend ourselves vigorously."

So what does the Facebook IPO tell us about investing on Wall Street? Was it a case of fair risk or casino capitalism? Are the odds stacked against main street investors?

Inside Story Americas, with presenter Anand Naidoo, discusses with guests: Felix Salmon, Reuters news agency's business blogger; Russell Mokhiber, editor of Corporate Crime Reporter, a legal newsletter; and by James Angel, associate professor of finance at Georgetown University.

"Facebook's mission is to make the world more open and connected. And we think that people's lives are going to be better and the whole world will function better when there is more information and understanding out there "

Mark Zuckerberg, the founder of Facebook, in the roadshow movie leading up to the initial public offering

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FACEBOOK IPO FACTS

  • Initial public offering or IPO, is a company's first public stock sale
  • Social networking site Facebook went public on Friday, May 18
  • Intense hype surrounded Facebook's IPO
  • Facebook stocks were priced at $38 a share
  • Facebook shares soared to a price of $45 per share on IPO day
  • Facebook stock has lost about 15% of its initial value
  • 57% of shares sold on first day, came from Facebook insiders
  • The sale of Facebook's shares netted $16bn in profits for owners
  • Banks made about $275m on Facebook IPO
  • Facebook says it has more than 800 million active users
  • Facebook was worth about $104bn at public offering
  • Facebook IPO has eroded confidence in Wall Street
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