Facebook Fiasco Remains a Nightmare
The nation is pointing lots of fingers about the public offering of Facebook last week. Most of the attention seems to be focused on the social media’s Chief Financial Officer Davis Ebersman, and the fact that he decided to increase the number of shares offered to investors by twenty five percent just days before the IPO. According to Wall Street specialists, that move may have cost the social networking company the opportunity for its stock to jump on it’s first day of trading, the hallmark of a successful IPO.
Unfortunately, instead of the positive financial move this should have been, the Facebook IPO is rapidly becoming a legal and financial nightmare for the company and Wall Street. While there are plenty of complaints being made, the CFO is not one of them.
Not very long ago, the move to go public for Facebook was hyped as the deal of the century, but investors are now frustrated with at least three aspects of the IPO. The first issue was the failure of the NASDAQ computer systems on the morning of the deal. Lots of investors were unable to place or cancel stock orders, as well as being left in the dark as to whether their orders were even executed. The glitch may have caused lots of investors to lose money.
Second in the line of concern is that the Facebook stock did not shoot up as much as expected on the first day of trading. Investors know how hot IPO’s trend up and have come to expect it as a quick way to pick up some quick and free money. Although nothing is guaranteed and every dollar that short term investors make is money the company gives away, underwriters do a better job for their clients when their stocks are priced just under the prevailing market value. For Facebook, the initial market value was about ten percent higher than the IPO price which was a lot of free money for investors.
The real complaint developed out of the revelation that big investors had access to better info about the condition of the Facebook business than small investors did. The result of this may have played into the modest pop on the first day of trading, as well as the price decline.
The inside information given to big institutions included estimates for Facebook’s future performance developed by underwriters’ research analysis. They are verbally distributed in IPO’s to decide on a fair price to pay for the stock. Halfway through the show, underwriters lowered their estimates for Facebook which is very unusual. The reason this was done was due to info from Facebook that the company’s business outlook had deteriorated. This information was not shared with small investors so they bought, while many big investors with the inside information, got cold feet and canned the deal.
Underwriters like Morgan Stanley have vowed that they followed the rules, but if they did, the rules are unfair as big institutional investors learned just before the IPO that Facebook business had deteriorated while smaller investors thought everything was just fine.