Bloomberg News

Facebook Shares Slump Below $29 as Options Trading Starts

May 29, 2012

Facebook went public as the equity index was heading for its biggest monthly decline since September. Photographer: Brendan Smialowski/AFP/Getty Images

Facebook went public as the equity index was heading for its biggest monthly decline since September. Photographer: Brendan Smialowski/AFP/Getty Images

Facebook Inc. (FB:US)shares (FB:US) fell to a new low, extending losses from the worst-performing large initial public offering during the past decade to more than 24 percent.

The stock fell 9.6 percent to $28.84 in New York, below the prior low of $30.94 on May 22. Facebook debuted on May 18 after underwriters sold shares at $38. Facebook options (FB:US) trading began today, with volume for puts exceeding calls by 1.2-to-1, data compiled by Bloomberg show. More than 200,000 puts giving the right to sell traded.

About $25 billion in market value has been erased from Facebook as bearish sentiment built in stock and options markets after the social networking site went public while U.S. equities headed for the biggest monthly decline since September. The company, its underwriters and Nasdaq OMX Group Inc. (NDAQ:US) were sued last week by investors who say they lost money in the IPO. June $30 puts were the most-active (FB:US) contracts, with volume at 23,723. They were followed by June $34 calls and June $32 calls.

“People are disillusioned,” Matt McCormick, who helps oversee $6.2 billion at Bahl & Gaynor Inc. in Cincinnati, said in a telephone interview. He doesn’t own shares of Facebook. “A lot of investors believed the hype,” he said. “In this type of volatile market environment, people are not going to take chances.”

Facebook shares climbed as high as $45 on May 18, when the shares ended the day with a price-earnings ratio of 83.1, making the Menlo Park, California-based company more expensive than 99 percent of Standard & Poor’s 500 Index stocks.

MF Global

The IPO, which set a record for technology companies by raising more than $16 billion, produced the worst five-day return among the 10 largest U.S. deals of the past decade. The 13 percent loss through May 24 exceeded the 10 percent drop by MF Global Holdings Inc. in its first five sessions.

The stock plunge has also pushed the purchase price for photo-sharing site Instagram Inc. below the $1 billion that Facebook offered last month. Facebook is paying $300 million in cash plus about 23 million shares of common stock to acquire Instagram. The deal is now valued at about $963 million.

Facebook and Morgan Stanley, its lead underwriter, faced criticism for boosting the number of shares sold in the IPO by 25 percent to 421.2 million in the days before the deal. They also increased the asking price to $34 to $38 from $28 to $35.

The first day of trading was disrupted by the “poor design” of Nasdaq OMX’s software for IPO auctions, Robert Greifeld, the chief executive officer of the exchange operator, said on May 20. The malfunction also prevented Nasdaq OMX from sending messages to brokerages confirming that clients’ orders went through.

“Investors are incorporating the risks embedded in the stock,” Brian Wieser, a senior analyst at New York-based Pivotal Research Group LLC, said in a telephone interview today. He has a sell rating on the stock and a $30 share-price estimate. “A lot of people are trying to trade the stock on the basis of those expectations. Options will be a very robust marketplace with respect to Facebook.”

To contact the reporter on this story: Inyoung Hwang in New York at ihwang7@bloomberg.net

To contact the editor responsible for this story: Nick Baker at nbaker7@bloomberg.net


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Companies Mentioned

  • FB
    (Facebook Inc)
    • $76.68 USD
    • -2.36
    • -3.08%
  • NDAQ
    (NASDAQ OMX Group Inc/The)
    • $42.12 USD
    • -0.30
    • -0.71%
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