Trading glitches dampen Facebook IPO

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Trading glitches dampen Facebook IPO

Stocks close slightly above $US38 offering price.

Facebook made a surprisingly modest debut on the Nasdaq on Friday as a sky-high valuation and trading glitches capped the stock's rise.

Massive demand for the social network's initial public offering led to a 45-minute delay in the start of trading in the stock. Facebook set a new trading volume record for US market debuts, with over 515 million shares changing hands.

Facebook shares began trading late Friday morning and opened 11 percent above the $US38 offering price, but after peaking at about $US45 slid rapidly at the end of the day to close at $US38.23.

The IPO was the third-largest in US history and valued eight-year-old Facebook at $US104 billion.

It was what happened after trading started that had some on Wall Street fuming.

The Nasdaq Stock Market, where Facebook is listed, had problems sending electronic messages back to the brokerages that handle orders from individual, or "retail", investors, according to people with direct knowledge of the situation.

Because the electronic acknowledgements didn't come back from the exchange, the brokers were unable to tell their clients that trades had been executed. Such acknowledgements usually occur almost instantaneously.

The delay meant that, in one of the most anticipated stock offerings ever, frustrated brokers and investors didn't know if orders had actually gone through.

Facebook had priced its IPO at the top end of its target range and increased the size of the offering, becoming the first US company to go public with a valuation greater than $US100 billion.

Skeptics argued that a valuation of more than $US100 billion -- about equivalent to and exceeding that of Hewlett-Packard and Dell combined -- was far too high for a company that posted $US1 billion in profit and $US3.7 billion in revenue in 2011.

The IPO raised a total of $16 billion, minting thousands of new paper millionaires among Facebook's 3,500 employees -- and a handful of billionaires among its founders and early investors.

Market glitches

Investor confidence in the equity markets, where trading is largely computer-driven, has wavered since the "flash crash" in May 2010 when $US1 trillion in shareholder equity was temporarily wiped out in a matter of minutes.

In March, the botched IPO of BATS Global Markets, the third-largest US stock exchange, refocused attention on the potential for marketplace mishaps.

A series of unforeseen glitches hit the company's market debut on its own exchange and caused it to take the extremely rare step of withdrawing its IPO.

The debacle also led to a fouled trade in shares of Apple and caused a temporary halt in the stock.

When data-mining software maker Splunk went public on Nasdaq on April 19, it was very well-received and its shares soared, tripping a circuit breaker that temporarily halted the stock, but its shares continued trading on NYSE Arca during the halt, and those trades had to be canceled.

Just last Thursday, the IPO of Andina Acquisition, a small Nasdaq-listed company, went awry and a batch of trades had to be canceled.

The next day, Nasdaq ran the first of four days of tests on its IPO systems in the week leading up to the Facebook's debut.

"They were trying to beef up their equipment in anticipation of this so they need to continue to invest in their equipment because it's a little unsettling when market structure doesn't function correctly," said Stephen Massocca, managing director at Wedbush Morgan, a broker in San Francisco.

Battle of the giants

Facebook faces many challenges as it takes its place beside Google, Apple and as one of the giant public companies defining the next-generation Internet economy.

Google in particular views Facebook as a mortal threat and is moving aggressively to integrate social networking features across its products.

At the same time, scores of young companies are building new products and services, in some cases on top of the Facebook platform and in some cases in competition with it, and attracting huge amounts of investment capital.

A handful of such so-called Web 2.0 companies, including Zynga, LinkedIn, Yelp and Groupon, have already gone public, and others have been acquired by the industry giants.

In a sign of the volatile nature of highly valued Internet stocks, all these shares fell on Friday in sympathy with Facebook's weaker-than-expected debut.

In particular, social gaming company Zynga, which relies on heavily on Facebook and also provides more than 10 percent of Facebook's revenues, fell by more than 14 percent.

Facebook's formidable assets include 900 million users around the world, many of whom spend hours a day on the site and share enormous amounts of personal information.

That in turn enables Facebook to target its advertising to peoples' specific interests, and many analysts believe the huge store of personal information gives Facebook an advantage that Google and other cannot match.

Analysts say the company has untapped opportunities in mobile computing, and potentially other internet services such as email and search.

Skeptics note that only a small percentage of Facebook users respond to advertising on the site. Google retains a big advantage in that regard, because advertising related to specific Internet searches is by nature far more relevant and thus more valuable.

In a sign of the challenges ahead for Facebook, the US' third-largest advertiser, General Motors, said last week that it was canceling its paid advertising on the site.

Global Equities analyst Trip Chowdhry said the stock debut was "lackluster" because Facebook's growth prospects do not justify a high stock valuation.

"They have serious technology and business model problems. Facebook is overhyped and drinking its own Kool-Aid," he said. "They are only getting $US4.39 per user per year. Google gets almost $US30 per user."

In Silicon Valley, though, the conventional wisdom is that Facebook and its social media brethren will be an increasingly important force in the business world for many years to come.

Already, the influx of wealth arising from Facebook's extraordinary growth has helped drive a mini-boom in San Francisco Bay Area real estate, and income tax revenues related to the IPO will cut the state of California's budget deficit by an estimated $US2 billion.

(Additional reporting by John McCrank, Jonathan Spicer, David Gaffen, Jennifer Cummings, Jessica Toonkel, Chuck Mikolajczak, Yinka Adegoke, Ed Krudy, Olivia Oran)

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