Facebook IPO: Lackluster trading after all the hype

(MoneyWatch) Facebook (FB) hit the tape in its debut at $42.05 per share, up 11 percent from the $38 per share IPO price. The stock meandered around $40 for most of the day, before closing at $38.23. While the deal was huge -- the second-largest in U.S. history -- the first day of trading was more whimper than bang.

In fact, some asset managers called the offering a "dud" and a "flop," but I'm not so sure I agree. After all, a big first-day move to the upside would mean that insiders had left a bunch of money on the table. In this case, the tight trading range may indicate that the bankers did a good job of pricing the offering.

Another weight on the stock price could be the potential for a large wave of Facebook employee selling when the six-month lock-up period is complete. Even if some of the true believers want to hold on to their shares, there is a quirky tax issue that they face. Facebook granted Restricted Stock Units to employees (RSU's) to allow them to participate in the growth of the company. The upside for the company was that RSU's are not counted as shares under securities laws and therefore, the company avoided having to file for an IPO when it hit 500 shareholders.

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The other benefit for the company is that it will be able to deduct the RSU grants and save a staggering $16 billion in taxes. The flip side is that employees will be hit with a nasty tax bill, whether or not they decide to sell the RSUs. And unlike the stock options, which have a built-in incentive to hold the stock once the option is exercised in order to qualify for the lower long-term capital gains rate, rather than higher short-term rates, RSUs have no such incentive.

That means that Facebook employees are staring down the barrel of a combined state and federal tax rate of 45% on their RSUs. Unless these people have lots of money on the side, it's likely that in mid-November, many more shares will hit the market. The potential wave of future selling could have also kept a lid on gains in the first day of trading.

Still, there was so much hype, that it's understandable that most would see the first day as a disappointment. It also appears that Facebook's muted first-day performance may have dragged down some of its social media brothers and sisters, including: Groupon (GRPN -6.7%), LinkedIn (LNKD -5.5%), Yelp (YELP -12.5%), Pandora (P -7.4%) and Zynga (ZNGA - 13.9%, trading in the stock was halted twice, after falling more than 10 percent in five minutes and triggering a single-stock circuit breaker.)

Of course, with the offering done, now the hard work begins. Expectations are high for the social media giant as it attempts to expand its user and advertiser base and to develop and deploy a mobile strategy. While many early investors will see the IPO as an exit, for the company, this is the beginning of the next chapter.