'Facebook effect' sends a chill through IPO market

S&P is cutting its price target to $27 on Facebook, and the stock may be hurting the IPO market.

By Roland Jones

Facebook?s stock offering was supposed to jump start the broader IPO market.

It seems to have done the opposite.

After the No. 1 social network?s initial public offering went awry???losing hundreds of millions of dollars for individual investors and raising questions about the fairness of Wall Street stock offerings ? a number of other companies are putting their IPO plans on ice, worried that investors have a low appetite for investing in new stock offerings.

Online travel website Kayak.com is the latest high-profile name to delay its IPO. The company has reportedly postponed the roadshow for an offering, which was scheduled to start last week. Morgan Stanley, which hit the headlines as the lead bank for Facebook?s botched IPO, was due to lead Kayak?s IPO.

?There?s definitely some spillover from Facebook?s IPO to other Internet companies,? said Jay Ritter, a professor of finance at the University of Florida and an expert on IPOs.

?Social media stocks, in particular, have fared poorly since Facebook?s IPO,? he added, noting that Zynga, an online gaming site, has lost 18 percent of its value since May 18.?Daily coupon site Groupon has declined 4 percent since then, and it has lost over 50 percent of its value since it went public in November.

However, it?s important to keep the market impact of Facebook in perspective, Ritter said.

Facebook shares are now down about $10 from the initial offering price of $38. With 2.7 billion shares outstanding, that amounts to a $27 billion loss in value for Facebook since its IPO, he said. Individual investors only own about 15 percent of that amount he added -- a sum that?s a fraction of the $15 trillion aggregate value of the U.S. stock market.

David Menlow, president of the research firm IPOfinancial.com, reckons another factor contributing to the poor IPO market is companies looking to go public are distancing themselves from Morgan Stanley.

Kayak?s delayed offering follows the decision of another company with a Morgan Stanley-led IPO -- Tria Beauty, which sells cosmetics and other beauty products -- to postpone its offering. Tria cited market conditions, but these days that can be a euphemism for ?unable to get the right price in the market,? Menlow said.

?Ever since the Facebook IPO problem, which continues to plague the market, there has been a rash of uncertainty that any technology stock offering is going to get a valuation haircut,? he said.

A company that is looking to go public with a stock price between $14 and $16 may be told that their offering won?t get done at that level, Menlow explained. The company might be offered a range of between $10 and $12, or whatever is appropriate below the desired range, he said.

?Companies may be unwilling to take those numbers,? Menlow said. ?It might not be to their liking.?

Related: Valuation expert: Facebook has lower to go

Menlow also notes that some companies are launching stock offerings to pay off debt, and they may not want to accept a smaller potential gain from an offering, as it may mean a reduction in the amount of money they receive to service their debt obligations.

Stormy market conditions are also to blame for the chill in the IPO market, analysts say. The benchmark S&P 500 stock index is on pace for its worst monthly decline since September on increasing concern over the euro zone?s debt crisis and the strength of the U.S. economic recovery.

Ritter notes that, traditionally, the IPO pipeline has been hyper-sensitive to strong moves in the stock market, on both the downside and the upside.

?In the past, when the market has taken a downturn, the IPO market has dried up, and May has been a crummy month for stocks,? he said, noting that a dip in the aggregate value of U.S. stocks has wiped away $1 trillion dollars of investor wealth so far this month.

Cancer Genetics is a case in point, he said.

The biotechnology company, which develops genetic tests to detect cancer, filed plans in December for an estimated IPO of up to $50 million to fund research and development and to repay debt. It has since nixed those plans, noted Ritter, and the likely cause was the poor state of the market and not the Facebook debacle, he said.

Another company -- Loyalty Alliance Enterprise, which sells marketing solutions to businesses -- is unlikely to go ahead with its planned public offering, Ritter added. And on Thursday London-based Graff Diamonds said it will postpone its $1 billion IPO in Hong Kong due to poor market conditions.

?The decline in stock markets, especially in Europe, has definitely put a dampener on the IPO market,? he said.

The effect on businesses of a slowing IPO market can be significant, Ritter added.

Corporations go public to raise money to expand their businesses, and if they can?t do that they ultimately invest less and ultimately hire fewer people. Also, existing employees who want to sell their stock in the company won?t be able to -- six months later, when employees can cash in on so called ?restricted stock units.? Those employees might be thinking of buying a new home, or a car, he said.

Facebook?s IPO can be vital to California?s economy, Ritter said. The fiscally distressed state is expected to reap billions from the purchase of new homes, cars, and capital gains taxes from wealthy Facebook employees, he said.

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