Hey, America. Don’t you just love the train wreck that has ensued following Facebook's humongous IPO?
You can’t get enough of it, the hand-wringing, the squirming the whole public spectacle of embarrassment.
Of course, you love it.
And here’s why: We all know that you — the heartland, the people we fly over, Main Street — got it right and Wall Street got it wrong.
Wall Street, Silicon Valley and the media all look bad. Each one contributed to the hype.
These days, social-media tools represent a pretty good cross-section of America and allow ordinary people to have an opportunity to express their opinions.
The Pew Research Center’s Project for Excellence in Journalism pointed out on Monday that the social-media behemoth’s May 18 IPO, which placed the worth of Facebook (NASDAQ:FB) at $105 billion, “sparked significant discussion on Twitter, blogs and Facebook itself, with more expressions of skepticism than confidence about the stock’s value.”
Twitter users were the most skeptical of all, as nearly four times as many users said that Facebook was overhyped as said it was worth buying, Pew noted, adding tellingly:
“Even on Facebook, the gap was nearly two-to-one.”
There is a lot of pain to go around on this debacle of an IPO. But for once, Main Street is having the last laugh.
I asked veteran Silicon Valley observer Paul Carroll — a former Wall Street Journal tech reporter, a consultant and the co-author of “Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 years” — what he thought of the Facebook flop. (The Wall Street Journal, like MarketWatch, is owned by News Corp.) Carroll said, speaking as if he echoed the view of the heartland.
“I think it’s a good thing, the only way to kill the hype that goes into some of these goofy IPOs is to make the people pay for getting sucked in. It’s a hard lesson, but next time people might pay more attention.”
The Facebook flop — the “Gigli” of IPOs — was drenched in arrogance from the start. For one thing, it was priced way too high, considering that there were so many questions about its bottom line, growth prospects and long-term strategy.
The Nasdaq, where the shares are being traded, couldn’t get out of its own way long enough on May 18 to smoothly execute the trades. At the very start of trading, NASDAQ's system could not handle the huge volume, and sputtered to a halt. Brokers did not know if their sell or buy orders had gone through. When Facebook's stock plummeted they had no way of knowing if their clients were still in the marketing or out of it. Chaos ensued.
From the start on the debut day of trading, there was chaos in the air. There had already such build-up to the start of trading that the last thing Facebook needed to see were any technical glitches in what should have been the mundane act of executing trades.
Wall Street wasn’t alone in taking a hit on the Facebook IPO. Silicon Valley deserves some blame, too for pushing these crummy investments onto the market. Facebook’s road show merely reaffirmed what a lot of us thought: it is a haven of 25-year-old billionaires, who invent time-suck gadgets.
One more faction should come in for grief as well: the media.
Well, where to begin? America despises my brethren for a good reason: We are the dopes who hyped the Facebook IPO, with our misplaced priorities and panting coverage of such nonsense as whether CEO Mark Zuckerberg’s was out of line to wear his trademark hoodie during the pitch sessions on Wall Street.
Maybe the journalists should have been more concerned about the state of Facebook’s financial data than the fashion whims of a 28-year-old CEO.
As it turned out, Main Street got it right, trumping the professional investors on Wall Street.
COMMENTARY: Facebook was a failure as an IPO. The bottom line is that the underwriters floated too many shares and offered the stock at too high of a price. These factors caused big money to stay on the sidelines rather than jumping into the stock.
You knew there would be lawsuits after this IPO:
- Class Action Lawsuit by Facebook Investers vs Morgan Stanley and Goldman Sachs Group - On May 22, 2012, A lawsuit has been filed by three Facebook investors who say that analysts at Morgan Stanley (NYSE:MS) and Goldman Sachs Group, Inc. (NYSE:GS) reduced theire forecasts on Facebook's revenues and earnings during the company's road show to promote the IPO. Late Tuesday night, the Attorney General for the State of Massachusetts sent a subpoena to Morgan Stanley after the news broke. In addition, more investors filed suit after feeling cheated by the underwriters about the true valuation of Facebook. The lawsuit that came out this morning is seeking class-action status as the underwriters’ mislead investors allegedly on the valuation of the stock. The lawsuit alledges that these underwriters’ did not properly disclose any changes to forecasts and expectations of Facebook. A Morgan Stanley spokesman said in response to the lawsuit that the bank followed the same procedure as it has done with all its IPOs. Furthermore, the spokesman said that the standard procedure follows all laws and regulations.
- Class Action Lawsuit by Facebook Investors vs Facebook Inc, Individual Defendents and Lead Underwriters - On May 23, 2012, Law Offices Bernard M. Gross, P.C. filed a class action lawsuit in the United States District Court, Southern District of New York, 12cv4081, on behalf of all persons who purchased the common stock of Facebook, Inc.pursuant and/or traceable to the Company's May 18, 2012 initial public offering (the "IPO" or the "Offering"), against the Company and certain individual defendants and the lead underwriters of the IPO for violations of the Securities Act of 1933. The Complaint alleges that the Registration Statement and Prospectus contained untrue statements of material facts, omitted to state other facts necessary to make the statements made not misleading and were not prepared in accordance with the rules and regulations governing their preparation. Specifically, defendants failed to disclose that Facebook was experiencing a severe 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 Underwriters 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 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, selectively disclosed by defendants to certain preferred investors and omitted from the Registration Statement and/or Prospectus.
These lawsuits are probably just the beginning of the legal iceberg. You can bet that there will be more including investigations.
On May 18, 2012, shortly after the stock markets closed, the Securities and Exchange Commission (SEC) indicated after the market close of trading on Friday, May 23, 2012, that it would review trading issues on the Nasdaq related to Facebook’s initial public offering. There were reports that some confirmations about order execution were late in coming from the exchange when Facebook shares began to trade earlier in the day. An SEC spokesman told CNBC when asked about the complaints.
“As is our practice, staff will review the incident with Nasdaq to determine its cause, and steps that will be taken to address it."
There were 2.58 billion shares traded at the Nasdaq Friday — the highest level since Dec. 16. Of that, about 573 million shares were Facebook trades, accounting for over 22 percent of the volume.
NASDAQ has set aside money to compensate customers, but some on Wall Street are warning its ability to snag future big IPOs is at risk. Meanwhile, a suit filed late Tuesday in Manhattan federal court seeks class-action status for anyone who lost money due to a mishandled order.
Former SEC Chairman Arthur Levitt said of the IPO and its handling by banks and Nasdaq.
"It's dreadful for the markets. It's an event with long-lasting negative implications for an industry that can ill afford this kind of blemish, and the last chapter hasn't been written. Nobody looks good here."
NASDAQ had its annual shareholders' meeting on Tuesday, May 22, 2012, but the shareholders gave the stock exchange a pass on the Facebook technical gliche, discussing it only for a few minutes, top executives did not get any questions at all on what went wrong with Facebook or what they were doing to correct it.
Nasdaq Chief Executive Bob Greifeld said at the shareholder meeting.
"While clearly we had mistakes in the Facebook listing, we still want to highlight the fact that it was the largest IPO ever and on Friday of last week, we processed over 570 million shares."
I have yet to see a report on the SEC's investigation of the NASDAQ technical gliche that created so much havoc for the traders during the huge Facebook IPO. For the sake of stock investors, brokers and traders we must determine the exact nature of that problem, what caused it, what is being fixed or changed, and the present status of the problem..
It's my opinion that the SEC needs to come down very hard on both Morgan Stanley and Goldman Sachs Group, if as claimed in the above class action lawsuit, they selectively provided revised Facebook forecasts to some of their key institutional investors without providing this information to the general public. If the charges are true, both firms are in direct violation of SEC regulatinos, and should be severely fined, their CEO's should be asked to step down, and both firms should be prevented from underwriting future IPO's for a period of one year or longer.
As far as I am concerned, Facebook's huge pre- and post-IPO market valuations needs to be fully evaluated and brought into question. If you have been following my blog posts, I have attacked the ad-supported revenue model of social networks, in particular Facebook. In a blog post dated May 20, 2011, I told my readers that I thought that the ad-supported revenue model was deeply flawed and had already reached a "critical inflection point," where both future user growth and advertising revenues will plateau and eventually reach a peak. I don't know if the two analysts for Morgan Stanley and Goldman Sachs read that blog post, but they obviously felt that Facebook's future revenues and earnings needed to be revised.
Courtesy of an article dated May 23, 2012 appearing in The Wall Street Journal's MarketWatch and an article dated May 23, 2012 appearing in ValueWalk and an article dated May 23, 2012 appearing in The Wall Street Journal's MarketWatch and an article dated May 23, 2012 appearing in Yahoo! Finance
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