Nasdaq may pay fines, but Facebook and its bankers are to blame for its share slump post IPO

Investors who bought shares in its IPO haven’t been as cheery as these Facebook executives.
Investors who bought shares in its IPO haven’t been as cheery as these Facebook executives.
Image: AP Photo/Nasdaq via Facebook, Zef Nikolla
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It looks like Nasdaq will have to pay up for the technical difficulties the exchange had during Facebook’s much anticipated IPO last year. But the blame for Facebook’s longer-term share performance lies more with Facebook and its lead underwriters than Nasdaq.

The Wall Street Journal reported Nasdaq is in talks with the SEC to pay a fine of about $5 million, in addition to the $62 million the exchange has already offered to pay customers for the Facebook snafu. Despite trial runs and other preparations made by Nasdaq, trading of Facebook shares was delayed by a half hour last May, causing mass confusion and hundreds of millions of dollars in losses.

But beyond the first days when trades were still being figured out, Nasdaq’s culpability largely ends. The exchange glitches don’t explain Facebook’s stock fall from its listing price of $38 to where it’s currently trading in the $29 range (though the stock has come back from its 52-week low of $17.55).

Instead, Facebook and its underwriters, led by Morgan Stanley, believed the Facebook hype and overestimated demand. They kept the offer price at $38, even when they increased the size of the offering by 25% just two days before trading began. Facebook had already upped the offer range from $28 to $35 to a window of $34 to $38.

Some large institutional and mutual fund investors warned Facebook’s banks that the pricing combined with the increased offering would not be supported, especially given headwinds Facebook faced in its mobile strategy.

Most recently, Facebook’s fourth-quarter earnings report beat estimates but operating margin fell and analysts warned about the social media site’s spending and how that could affect profits.  So it may be some time before Facebook hits its offer price of $38.

Of course the Nasdaq fine for Facebook isn’t good news for the exchange and continues its string of bad luck. Nasdaq’s bid to merge with the New York Stock Exchange was shot down by antitrust regulators in 2011. Late last year, NYSE decided to sell to the IntercontinentalExchange. In 2006, the London Stock Exchange rejected a bid from Nasdaq.

That’s why the Facebook listing was an especially bright spot for Nasdaq, which competed with the NYSE for Facebook. With other highly anticipated tech IPOs, like Twitter, possibly coming down the pipeline, Nasdaq is surely hoping that the SEC fine won’t set a precedent. One sort of bright spot for Nasdaq is that the volume of trading for Facebook’s first day was pretty unprecedented, so the exchange should be less overwhelmed for future IPOs of tech darlings.