Nasdaq's $51m offer for Facebook losses draws criticism

NEW YORK (REUTERS) - Nasdaq OMX Group said it will offer US$40 million (S$51 million) in cash and rebates to clients harmed by its mishandling of Facebook's market debut.

But the proposed compensation, subject to approval by regulators, drew sharp criticism from rival exchanges for its use of rebates and from clients claiming losses far in excess of what Nasdaq is offering.

Nasdaq said on Wednesday US$13.7 million would be paid to its affected member firms and the balance would be credited to members to reduce trading costs, with all benefits expected to be awarded within six months.

'We have been embarrassed and certainly we apologised to the industry, but the important thing we have to do is focus on the future,' Nasdaq chief executive Robert Greifeld said in an interview on CNBC on Wednesday.

Facebook underwriter Morgan Stanley defends IPO

NEW YORK: The chief executive of Morgan Stanley on Wednesday defended his company's lead role in the disastrous IPO of Facebook, which has lost investors billions of dollars.

James Gorman told an internal staff meeting that the bank had worked "100 per cent within the rules" in heading the US$16 billion stock issue, according to a person who was at the meeting.

The source said Gorman also condemned the "speculation of nefarious activity" that has surrounded the issue and drawn at least eight class action lawsuits against Facebook and its underwriters.

He said the social networking giant itself was happy with the bank, even though the company's shareprice has now sunk nearly 26 per cent from the US$38 initial public offering price.

Facebook's chief operating officer Sheryl Sandberg had told him that the company "is very pleased with the way Morgan Stanley conducted itself, (saying) that we were very professional," Gorman told the group, according to the source.

Gorman blamed the overall economic environment -- especially the Greek financial crisis -- as well as technical problems at the Nasdaq market for "unprecedented confusion and disarray at the opening," when Facebook shares began trading on May 18.

"You don't control Nasdaq and you don't control Greece and the environment," he said.

It all "made for a very difficult start" .

Facebook's shares barely held above the issue price on the first day of trade and have steadily fallen ever since, wiping US$27 billion off of the company's IPO market valuation of US$104 billion.

Those losses have been taken by investors who are furious over how the country's second largest IPO ever flopped.

The anger stems in part from Morgan Stanley's having approved an increase in the shares issued and the share price just days before the share sale.

Also driving the fury and the lawsuits are allegations that the underwriters had given their best institutional clients private, downbeat forecasts for Facebook's finances just before the shares hit the market, while denying the same information to small investors.

The result, the accusations say, was that the better-informed big investors immediately dumped their shares leaving smaller investors to take the losses.

Gorman insisted that the shareprice should be seen over a 12 month period, and not just in the short term.

"Facebook is a great company and will still be in so in a few months," he said.

After flat debut Facebook awaits market verdict

NEW YORK: Facebook stumbled on its first trading day as shares ended barely above the starting price, raising questions about what will happen to the share price when the Nasdaq reopens on Monday.

The stock, priced at US$38 on Thursday in the largest ever initial public offering (IPO) for a technology firm, eked out a gain of just 0.61 per cent to end at US$38.23, amid record volume of more than 575 million shares traded.

Shares in the social network titan saw roller-coaster action in what was one of most keenly awaited stock issues in history. The day began with a 30-minute delay in trade, an incident which regulators are still reviewing.

Shares jumped 12 per cent to US$42.55 in opening trade but within minutes fell back to the offering price. A midday rally failed to sustain its momentum and the price tailed off before the close.

"The negativity in the market overall has put a damper on the IPO," said Darren Hayes, a Pace University professor and former investment banker.

"It's not uncommon in an IPO to see a big rise and then for the price to come back down, but I'm a bit surprised after all the hype to see such a small gain."

A report on the Business Insider financial blog said the price held at US$38 because of a large number of standing orders at the offering price. The Wall Street Journal said the underwriting investment banks stepped in to support the price.

"It's hard to know what would have happened if the banks hadn't stepped in," said Lou Kerner of the Social Internet Fund.

James Hughes, chief market analyst at London's Alpari, said "the real value of Facebook is not likely to be known until the hype of the IPO has died away and investors have been able to digest how the company is going evolve to be the money-making machine many expect it to be."

Investors were expected to be hungry to get a piece of Facebook, which has become a global phenomenon since its humble beginnings in 2004 as a project of then-Harvard student Mark Zuckerberg and his classmates.

Zuckerberg, 28, wearing his trademark hooded sweatshirt, remotely rang the bell to open the Nasdaq, marking the start of trade.

He told the crowd at the company's new campus in Menlo Park, California, that going public is a "milestone" but added: "Our mission isn't to be a public company. Our mission is to make the world more open and connected."

The market debut was disappointing compared with some recent tech IPOs. LinkedIn, a business-oriented social network, doubled its share price on its first day, and Groupon, a discount deal aggregator, jumped 30 per cent.

Others have not fared so well. Pandora, an Internet radio site, rose a more modest 8.9 per cent and online gaming site Zynga lost five per cent on its first day.

Trip Chowdhry, who follows Facebook for Global Equities Research, said the "lackluster" opening was because the company had failed to answer crucial questions about how it will boost revenues and adapt to the mobile Internet.

"Management cannot sing and dance around the key issues," he said.

There are concerns about Facebook's long-term ability to generate ad revenues, fueled by General Motors' decision earlier this week to pull its advertising.

GM had been spending about US$10 million on paid advertising and US$30 million on unpaid marketing on Facebook.

Another shadow hanging over Facebook is privacy.

Some consumer and privacy advocates say Facebook has been too loose with user data and hope that as a publicly traded company it may change its tune.

The IPO gave Facebook a dizzying value of US$104 billion at its market debut.

It raised more than US$16 billion, making it the richest after that of financial giant Visa in 2008, according to Renaissance Capital. The addition of a possible stock "over-allotment" could boost the total to US$18.4 billion.

With its current market value, Facebook is now among the most valuable US companies, ahead of sector giants Amazon (US$96 billion) and Cisco (US$89 billion), and more than twice the value of Ford Motor Co. (US$38 billion).

But it remains behind Google (US$196 billion) and Apple (US$496 billion).

Under the share plan, Zuckerberg holds 55.8 per cent of the voting power of Facebook shares, and over 18 per cent of the value of the company.

Despite the lingering concerns, some still see huge potential for growth.

"Facebook is a business that can succeed with far fewer employees than the technology behemoths of old," said Victor Basta of London-based Magister Advisors.

"Facebook's IPO filing implies a value per employee for its own business of US$33 million. Microsoft, by contrast, has a value per employee of US$3 million, reflecting the fundamental structural differences between the businesses."

Facebook posted a profit of US$668 million last year as revenue vaulted to US$1.06 billion.

Historic Facebook debut falls flat

SAN FRANCISCO - The historic initial public offering of Facebook Inc did not go as planned on Friday, as the social networking company's sky-high valuation combined with trading glitches left the stock languishing near its offering price at the market close.

Facebook shares began trading late Friday morning and opened 11 per cent above the US$38 (S$48) offering price, but after peaking at about US$45 slid rapidly at the end of the day to close at US$38.23.

The IPO was the third-largest in U.S. history and valued eight-year-old Facebook at $104 billion.

The surprisingly weak debut of a stock that analysts had predicted would climb between 10 and 50 per cent is not likely to dent the business prospects of Facebook, which boasts 900 million users and is upending business practices and social relationships around the world.

But the unexpected developments were a clear setback for Morgan Stanley, the lead underwriter on the deal, which sources said was forced to defend the US$38 price level by buying shares on the open market. Many market participants said they expected the stock to remain under pressure next week.

The offering also proved an embarrassment for the NASDAQ: the opening was delayed as the exchange struggled with a huge volume of orders, and for much of the day there were long delays in order confirmation. The SEC said late Friday that it was reviewing the situation.

Social media companies and Internet companies that had hoped to benefit from a Facebook halo effect were instead dragged down Friday, with social gaming giant Zynga dropping almost 15 per cent.

Analysts said Facebook may simply have over-reached in raising the IPO price range, pricing at the top of the range and increasing the size of the offering earlier in the week.

"The underwriters got greedy on behalf of selling shareholders and bumped the price high enough that they didn't get much of a bump on the first day," said Bill Smead, chief investment officer at Smead Capital Management, which did not buy Facebook shares in the IPO. "They increased the size of the deal and that really did a number on it."

Skeptics have argued all along that a valuation of more than $100 billion - about equivalent to Amazon.com Inc and exceeding that of Hewlett-Packard Co and Dell Inc combined - was far too high for a company that posted US$1 billion in profit and US$3.7 billion in revenue in 2011.

Concerns about Facebook's earnings potential were highlighted by General Motors' announcement this week that it would no longer buy paid advertising on Facebook.

"You don't need more than a small pencil and napkin to do a valuation on this, to say there are heroic assumptions in earnings growth to keep this at US$100 billion, much less US$115 billion or US$120 billion," said Dave Rolfe, fund manager at River Park Wedgewood Fund, which does not own shares in Facebook.

"I know there's a lot of excitement and exuberance, but it seemed today that the market is starting to do some hard valuation math early on."

Facebook's opening day on Wall Street does not bode well for the stock's performance in the days ahead, said Channing Smith, portfolio manager at Capital Advisors Growth, which does not own shares in Facebook.

"If you're an investment banker or if you're long the stock, I would definitely be a bit worried as we walk away to the weekend," he said.

The weak IPO may also give pause to private investors in Silicon Valley who have been pouring money into next-generation Internet companies at very high valuations in the hope of eventually taking them public.

MEDIA CIRCUS 

At Facebook's headquarters in Silicon Valley, the day began with company founder and Chief Executive Mark Zuckerberg, 28, symbolically ringing the opening bell for stock trading on Friday morning.

Wearing his trademark black hoodie, Zuckerberg, whose shares are worth nearly US$20 billion and who retains voting control over the company, hugged and high-fived Sheryl Sandberg, Facebook's chief operating officer, who is credited with bringing crucial business discipline to a company founded in a Harvard dorm room.

The area outside Facebook's offices was packed with photographers, more than a dozen television trucks, and a TV news helicopter hovering overhead.

Outside Nasdaq headquarters in New York, crowds also gathered, even as exchange officials struggled to sort out trading problems that left investors guessing whether their buy and sell orders had actually been executed.

The IPO minted thousands of new paper millionaires among Facebook's 3,500 employees - and a handful of billionaires among its founders and early investors. More than half of the proceeds of the IPO will go to existing shareholders, including early backers such as Accel Partners and Russia's DST Global.

In the run-up to the IPO, demand from institutional investors was strong, and many analysts had expected an influx of retail investors keen on owning a slice of a cultural phenomenon regardless of price. But that did not materialize.

"Flippers who waited all day for a pop that did not come decided to throw in the towel and get out," said Mohannad Aama, managing director at Beam Capital Management LLC in New York.

"That group also includes people who over-extended themselves in getting more shares than they can afford to hold - whether they got it from the syndicate or from the open market once it opened around noon."

Still, from Facebook's perspective, the stock performance could be seen as reflecting smart pricing: Zuckerberg and early investors pocketed maximum gains and left little of the easy money on the table.

"You want to price the offering correctly. Institutional buyers get a little bump and the company raises the right amount of money," said Kevin Hartz, co-founder and CEO of Eventbrite, an online ticketing startup that is integrated with Facebook's platform. "If the stock has a massive bump on day one, that means you misread market demand and the company could have raised more money with the same amount of dilution, or could have raised the same amount of money with less dilution."

BATTLE OF THE GIANTS
 
Facebook faces many challenges as it takes its place beside Google, Apple and Amazon 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 Inc, LinkedIn Corp, Yelp Inc and Groupon Inc, have already gone public, and others have been acquired by the industry giants. All of those stocks fell on Friday in sympathy with Facebook's weaker-than-expected debut.

In an indication of the land grab now under way in the Internet world, Facebook in April spent US$1 billion to acquire Instagram, a tiny photo-sharing company with lots of users but no revenue. A Facebook rival, social scrap-booking site Pinterest, raised money earlier this week at a valuation of US$1.5 billion in a sign that venture capitalists and other private investors still see enormous potential in Web 2.0 companies.

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.

"Literally everything you see on the Internet, you could see inside Facebook -- but done with much more of the social graph built into it," said Siva Kumar, CEO of e-commerce company TheFind. "In a way they operate the mall, and everybody in the mall will pay some way or the other to Facebook."

Facebook posted US$3.7 billion in revenue in 2011 and $1 billion in profit. Analysts say the company has untapped opportunities in mobile computing, and potentially other Internet services such as email and search. Zuckerberg, though unproven as a public company CEO, is widely admired as a product visionary who has done a masterful job in continually improving the Facebook experience.

Skeptics, though, 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 nation's third-largest advertiser, General Motors Co, 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 US$4.39 per user per year. Google gets almost US$30 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 US$2 billion.

Banks sink as US stocks close mixed amid Greece worries

NEW YORK (AFP) - Falling banking stocks dragged the United States (US) equity market down on Thursday amid worry about fallout from a Greek default, but Apple and Google helped the Nasdaq gain for a fourth straight day.

The Dow Jones Industrial Average fell 40.72 points (0.35 per cent) to finish at 11,478.13.

The S&P 500, a broader measure of the markets, fell 3.59 (0.30 per cent) to 1,203.66, while the tech-heavy Nasdaq Composite gained 15.51 points (0.60 per cent) to 2,620.24.

'US stocks spent most of the session south of break-even today, with banks leading the retreat in the wake of a less-than-stellar earnings showing from JPMorgan Chase,' said Ms Andrea Kramer at Schaeffer's Investment Research.

Long-Term Investing Works!

We hear the phrase all the time: "Invest over the long term! Don't punt in the stock market!" Is that really a wise investment?


THE CHANCE FOR A POSITIVE RETURN IS HIGHER

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We started with a familiar market again - the Straits Times Index. Our period: 25 years starting from the year 1976 and ending in the year 2000. This period included the 1979 Oil Shock, the 1986 Singapore recession, the 1997 Asian Currency crisis, and other world events which had an impact to a certain degree on Singapore, which is so exposed to external influences.

We first took a tally of all the positive growth periods in the Straits Times Index on a 1-year basis. There were 15 out of 25 years in which the Straits Times Index had positive growth. This means that if you had randomly picked the start of any year from 1976 to 2000 to buy into the Straits Times Index and you had a holding period of 1 year, you would have had a 60% chance of coming out ahead.

We then tried the same experiment on a holding period of 3 years. The result was that out of twenty-three 3-year periods, eighteen of these were gains. So, if you had invested in the Straits Times Index at the start of any year from 1976 to 2000 with a time horizon of 3 years, you would have had a 78.26% chance of coming out ahead (quite a large improvement over 60% isn't it?).
We also experimented with 5 and 10-year holding periods. Take a look at the results in the following chart.

Chart 1

Source: S&P Micropal

As you can see, when you extend the holding period to 10 years, there is a 100% chance that you would have made money. The question now is, does this apply only to the Singapore stock market? What if we were to try the same experiment on other stock markets? Well, we did, on six other stock markets:

USA (represented by S&P 500)
Technology (represented by NASDAQ)
Europe (represented by MSCI Europe)
Taiwan (represented by the Taiwan Weighted Index)
Hong Kong (represented by Hang Seng)
Japan (represented by the Nikkei 225 Index)
World (represented by the MSCI World USD)

Chart 2

Source: S&P Micropal

LONGER HOLDING PERIODS BETTER
As can be seen, the increasing percentages of positive periods for all the stock markets would seem to suggest that, at least historically, the longer your holding period, the greater the possibility of making money from an investment in one of the above equity markets.

In fact, in six of the markets shown above, you would have made money 100% of the time if your holding period were 10 years.

At this point, some may ask: "I can come out just 5% ahead after holding a Singapore fund for 10 years. That is a far cry from the 21.89% I would gain even if I were to keep it in a fixed deposit giving me 2% per annum!" That could be the case. After all, investing in equity markets are always riskier than investing in fixed income instruments.

So, we now choose to be more strict in our analysis. Instead of just having a positive gain, we choose to take the periods where the annualised gain (or average gain per year) is more than 4%. This is pretty reasonable since even the CPF special account can only promise 4% per year.

If an investment grew by 4% per year, after 3 years, it would have grown 12.49%. After 5 years, it would have grown 21.67%, and after 10 years, it would have grown 48%. This is because of the miracle of compounding (we won't go into that today as that isn't the focus of our study).

WHAT IF WE USE A STRICTER CRITERION

We also analysed the Straits Times Index with a stricter criterion. We counted periods where the returns were over 4% per year, over 12.5% for 3 years and more, over 22% for 5 years and more, and over 48% for 5 years and above. These would then be counted as a percentage against the total possible 1-year, 3-year, 5-year and 10-year periods over the last 25 years. The results are shown in Chart 3.

Once again, you can see that the rising trend over longer holding periods does not change. Also, even taking into account that our criterion is now far stricter, when you extend the holding period to 10 years, the probability that you would have gained a compounded 4% per year was 93.75%. Thirteen out of fifteen 10-year periods saw a gain of more than 93.75%, where the Singapore Straits Times index was concerned.

Just as with our initial analysis, we extended this to cover the six stock markets and the world index mentioned in Chart 2. The results are shown in Chart 4.

Charts 3 and 4

Source: S&P Micropal

SAME TREND IN OTHER STOCK MARKETS
The same rising trend can be seen for every stock market that we measured. For six of these stock markets, there was a higher than 90% probability that if you had invested in the stock market index at the beginning of any year since 1976, with a 10-year horizon, you would have made better than 4% per year. If you wanted to time the markets (meaning that you jumped into a market with all your money, then jumped out again after 1 year to hop into another market), then from a statistical point of view, your chances of making better than 4% per year would be significantly less and your transaction costs would be higher as well. We did not try to see if a shorter holding period of 6 months or less would give better results - we suspect that they won't.

One more interesting conclusion you might arrive from looking at Charts 4 and 2 is that the US stock market represented by the S&P 500 Index is a less volatile stock market than others. It had a 100% probability of having a 5-year gain, and also has one of the highest probabilities of having an average compounded 4% gain over the various periods measured. We believe that this is due to its low reliance on external fund flows. Most of the capital that make up the stocks in the US market are from US investors. Even during downtrends, US investors are not outward looking preferring to hold cash, or shift to bonds. This results in a more stable market environment where there are fewer drops, or spikes. As we mentioned in our previous article "Do Top Performing Markets Always Shine," there are times when other stock markets may outperform the US stock market. However, these stock markets may also be more volatile.

LIMITATIONS

These analyses are statistical in nature and have their underlying limitations. The two main limitations would be analysing past performance data (which are not a guarantee for future returns), and not taking into account transaction costs.

Nevertheless, this is balanced by two considerations. Regarding the limitation of looking at past data, the figures taken were from an extremely long period of 25 years, during which there were quite a few wars (especially in Middle East), there was a global oil shock, and recession. So, if you are a believer that history repeats itself, then you will also come to the same conclusion: Long-term investing works far better than short-term punting.

The limitation of transaction costs is balanced by the fact that we were measuring only the indices and not active funds that invested in these markets (most of the funds in Singapore do not have such long histories). If you choose a good fund manager, one that is able to outperform the market index he invests in over the long run, you will not only be able to cover any possible transaction costs, you may even have gains better than the market index.

In conclusion, we first state that our objective here was not to find the best stock market to invest in. We recognise that each stock market has its peculiarities, and some have historically been more volatile than others. However, based on our analyses, we can at least discover a common trend among stock markets regardless of their size, volatility and other attributes. This common trend is: Long-term investing has a higher statistical chance of giving returns than short term investing.