Facebook’s Failed IPO: A Fall Worthy of Icarus
from Dissent magazine:
Facebooks Failed IPO: A Fall Worthy of Icarus
Stephen F. Diamond - May 29, 2012
Facebooks much-maligned initial public offering has led to a wealth of commentary, a lot of it focused on the wrong issues. There is certainly enough blame to go around, but assigning blame requires clarity about what exactly happened. It will likely take several congressional hearings, a couple of regulatory agency investigations, and some shareholder lawsuits to flesh out all of the facts.
But while we wait let me suggest an argument, one that fits together many of those facts that are available and goes a long way, I think, to satisfying the demands of Occams razor. In short, the Facebook IPO may turn out to be the largest pump-and-dump securities fraud ever perpetrated against U.S. investors. This argument not only helps explain how this debacle unfolded but suggests that we need to rethink the way that our economy, particularly in high technology, is shaped.
A Social Network Looking for an Exit
To recall the basic scenario: Mark Zuckerberg and some Harvard classmates founded Facebook in 2004. The 2010 film Social Network captured the atmosphere of phenomenal, rapid growth surrounding Facebook, as well as the internal tensions among some very young and inexperienced entrepreneurs. The company now has some 900 million users on its platform worldwide. Not only is the company making a large amount of money (an impressive $1 billion in net income on revenue of $3.7 billion in 2011, for a profit rate of 27 percent), but it can arguably claim to have had a significant impact on the wider social and political world. Most notably, the social network played an important role in allowing young Egyptians to communicate during their uprising against the dictatorial Mubarak regime.
However, Facebook was not built just to be a social phenomenon, although Zuckerberg, who is its CEO and remains its dominant shareholder, tries at times to suggest that. Facebook was built with millions of dollars of investment capital provided by major venture capital firms and investment banks. At the beginning of 2011 Goldman Sachs raised $1.5 billion from investors in an offshore private placement for the company and invested an additional $450 million of its own funds. Many of Facebooks engineers and computer scientists were willing to work for the company in return for stock options. That, too, is a form of capitalist investment. The founders, the employees, the venture capitalists, the investment banks, and the investors were all looking for an exit opportunity to turn their investments of cash and human capital into a profitable return. That required a public offering and a listing on a major stock exchange. ....................(more)
The complete piece is at: http://dissentmagazine.org/online.php?id=607
targetpractice
(4,919 posts)I wonder how honest Facebook was with them before the acquisition.
Response to marmar (Original post)
rhett o rick This message was self-deleted by its author.
On the Road
(20,783 posts)or even as the disaster it's being portrayed as. It went public at 38. It closed today at $28.84.
It's not like they deceived anyone to my knowledge -- on the contrary, there was so much pent-up demand that tons of prospective buyers were unable to buy into the initial offering. A lot of IPOs sink after the first day, and a lot of tech stocks in the 90s declined a lot worse than FB. The company should be valued highly, just not quite as high as $38.
Facebook was smart to time the IPO so the buzz and its popularity were at its peak and they could command a higher price. They didn't need to misrepresent anything AFAIK.
The Stranger
(11,297 posts)During the inexplicable freeze of FB stock, new information was being circulated to the behemoth banks and hedge funds calling into question FB's value.
Regular folks never had access to that insider information, until it was too late.
On the Road
(20,783 posts)I had only read the first page, which is very general. The rest of it is quite interesting and I'm going to look at some other sources. There seem to be three basic areas:
1) the NASDAQ glitch on opening day. The article does not relate this to any supposed new information that was being circulated, nor does any other source I looked at.
2) The reporting of current mobile vs. landline trends. This seems to be at the heart of the author's charges. If Facebook falsified their financials, then they are guilty of fraud. But no one seems to be coming out and actually claiming that, at least not in so many words. Here's what Facebook said in its initial prospectus:
5....As an example, we believe that the recent trend of our [daily average users] increasing more rapidly than the increase in the number of ads delivered has been due in part to certain pages having fewer ads per page as a result of these kinds of product decisions These decisions may not produce the long-term benefits that we expect, in which case our user growth and engagement, our relationships with developers and advertisers, and our business and results of operations could be harmed.
In the infamous May 9 disclosure, which was sent to all prospective buyers, "five new sentences were added to the prospectus as a result (including the sentence in point 5 above relating to the number of ads delivered)."
[font size = "1"](Source: http://blogs.wsj.com/deals/2012/05/24/dealpolitik-suing-facebook-best-of-luck/)[/font]
Unless current revenue or traffic statistics were falsified, it's clear clear where the fraud is.
3) That leaves the internal selling. The company did not have the traditional holding period for employees and insiders. Perhaps it should be a requirement, but it's not. It's not surprising that a lot of employees who had been working for stock instead of salary wanted to cash in, get out of debt, and secure their retirement.
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It does look like Facebook fought their underwriters to maximize the IPO price. Insiders cashed in and retail investors lined up and said "take my money." The investment banks and institutional buyers took the major hit -- perhaps that is why the issue has some traction.
Something might be unearthed in the shareholder suits. But at this point I have to agree with the article linked above:
But what about those research analysts changing their estimates? It probably could not have worked any other way under our current regulatory scheme. Analysts who work for underwriters are prohibited from publishing their research prior to an IPO. They are permitted to talk to their clients and give their views. They are required to be independent from the investment bankers who run the IPO. If the May 9 disclosures caused them to think a change in their estimates was appropriate (and how could they not when a new recent trend was disclosed?), their independence requirement presumably forced them to make such changes. But the law still prohibited them from publishing any of their research.
Is there an unfairness in our regulatory system in which institutions have access to research analysts in an IPO and retail investors do not? There may well be. But that does not mean there was a violation of the law.
It is possible some deep dark conspiracy among Facebook and its underwriters could eventually surface. But there is no evidence of that yet.
Mojorabbit
(16,020 posts)jade3000
(238 posts)the photo that goes with that piece is worth the click. the story is just a bonus, not to be shallow.
but it is a good bonus & a good read.
FarCenter Fan
(19 posts)Icarus wasn't quite that arrogant and self-satisfied.
jeff47
(26,549 posts)In fact, it was a massively successful IPO. Facebook's goal was to get as much money as possible from selling stock, and they did so.
The fact that the stock has gone down afterwards doesn't mean the IPO failed, it means the investors who bought the stock at $38 failed.
(This obviously ignores the allegations that some people got a heads up that the stock was overvalued...still waiting for all the information on that to come out)