Facebook’s IPO debacle: greed, hubris, incompetence …
And perhaps worse: if Facebook had set out to showcase a car-crash of an IPO, it could not have done it better
It is three trading days after Facebook went public, and we now know that the IPO will live forever in the history books – just not in the way anyone had planned. Had Facebook openly set out to sabotage its own IPO, it could not have invented a better or more remarkable debacle: a tale of financial chaos fit for history books.
Facebook stock has lost 20% of its value in only three days. In that alone, it is not remarkable. Large IPOs rarely perform well just after going public. Fund manager Och-Ziff, for instance, fell 24% in its first week as a public company. (And thereafter: Och-Ziff went public in 2007 at $32 a share, and now trades at just over $7).
No, what makes Facebook stand out is that, at nearly every junction where wisdom, care and moderation ought to have intervened, they did not. In law enforcement, this is called a “smash and grab” – just knocking out the windows and taking everything in sight. On Wall Street, the disregard of the IPO for normal investors brought up a vulgar old traders’ saying: “Pigs get slaughtered.” Translation: greed gets punished.
As far as autopsies go, this is a complicated one, from the spiritual to the mechanical.
There was gracelessness: Mark Zuckerberg, Facebook’s CEO, made it clear for months that he disdained the company’s IPO, and deigned to show up to only one meeting with potential investors. That couldn’t have done much to convince those investors to believe that Facebook took the Wall Street system seriously enough to give them a good return on their investment.
There was greed: executives and insiders made the IPO primarily a way to enrich their own fortunes – rather than the company’s – and their stock dump accounted for 57% of the shares sold in the offering (reinforcing the old joke that “IPO” stands not for “initial public offering”, but “insider profit opportunity”). To pour more money in the pockets of these insiders and the company coffers, Morgan Stanley, the lead underwriter, hiked the price the company was charging investors – $38 – and flooded the market with tens of millions of extra shares. (The investment bank then had to rush back into the market and buy millions of those shares to artificially support the price of the stock on the first day.)
Pricing an IPO correctly – to predict, in essence, its fair market price – is a delicate art, which is supposed to balance how much investors may like a company with how much they’re willing to pay for it. For instance, you might buy your favorite cereal at $5 a box; but would you buy it at $20 a box? Probably not. You don’t like the cereal any less; you just don’t think it’s worth that large a chunk of your budget for groceries. People love Apple enough to pay $400 a share for it. But if Apple were valued the same way as Facebook, each Apple share would be worth more than $3,000.
There was hubris: throughout the process, Facebook made it clear that the company believed it was different from other companies. It could straightfacedly value itself at $104bn even though it had just $3.7bn in revenues, for instance. It angled for the title of the “the People’s IPO” and promised that one-fourth of the shares sold would go to regular mom-and-pop investors – even though the putative “people” would be buying overpriced shares from insiders eager to cash out. JP Morgan, one of the bank’s underwriters, added to the hype by slapping Facebook logos all over its headquarters like a school girl doodling the class hunk’s name into a notebook.
There was incompetence: Nasdaq, the company’s chosen exchange, froze up and delayed the IPO three times in the space of an hour because it couldn’t handle the volume of orders from investors – a good number of whom appeared to be rushing for the exits to sell the stock.
And finally, there may have been something in violation of securities laws. The most respected publications in the US reported that Facebook’s chief financial officer tipped off research analysts at the company’s three biggest banks that its upcoming financial results would be lower than expected. The analysts then took the incredibly rare move of tipping off large investors to the specific negative impact this would have on Facebook’s stock. Small investors had to resort to reading less educational entrails: a vague blurb in the latest regulatory filing about Facebook’s trouble breaking into the mobile market.
If this last is true, you can forget all that guff about “the People’s IPO”. US securities laws are very strict about what a company can say while it prepares to go public – which is to say, almost nothing. Executives maintain a “quiet period” for months. If the company has to disclose anything, it has to do so to all investors, at once. The fact that sophisticated investors knew the company was warning them about its prospects could have been enough to account for the determined selling of the stock from almost its first minute. Wall Street investors are far less patient with changing the goalposts than are the 900 million users of Facebook who accede to every whim of the company’s changing user agreements.
The irony of that is just too rich: after all the speculation about how the IPO went wrong, the real reason may have been very simple: Facebook didn’t know how to work its own privacy settings for investors. It couldn’t figure out, essentially, who should know what.
Still, the entire fiasco is a good lesson for Facebook, which is now an underdog rather than top of the roost. It forces the company to understand that it still has to work hard to earn its $90bn valuation. And while the IPO may have made Zuckerberg and his fellow executives a fortune, it doesn’t actually change the company’s fortunes.
Wall Street is a fickle master.
Facebook just learned that lesson earlier than most.
Shareholders have sued Facebook and CEO Mark Zuckerberg over the company’s bungled IPO, charging they hid bearish forecasts prior to going public.
The suit, filed Wednesday morning in the U.S. District Court in Manhattan by the Brian Roffe Profit Sharing Plan, Jacob Salzmann and Dannis Palkon, charges that Facebook and its lead underwriter concealed “a severe and pronounced reduction” in Facebook revenue growth forecasts before the company’s shares were offered to the public.
Among the highlights:
“The true facts at the time of the IPO were the Facebook was then experiencing a severe and pronounced reduction in revenue growth due to an increase of users of its Facebook app or website through mobile devices rather than a traditional PC such that the Company told the Underwriter Defendants to materially lower their revenue forecasts for 2012. And, defendants failed to disclose that during the roadshow conducted in connection with the IPO, certain of the Underwriter Defendants reduced their second quarter and full year 2012 performance estimates for Facebook, which revisions were material information which was not shared with all Facebook investors, but rather, was selectively disclosed by defendants to certain preferred investors and omitted from the Registration Statement and/or Prospectus.”