Facebook IPO Freefall

In business you take risks.

Via the WSJ.

How badly did Nasdaq screw up the Facebook offering? Nasdaq is in a service business, and it served its customers terribly. It couldn’t get trading in the shares started on time. It didn’t act on orders that some investors and traders submitted and was woefully late in sending confirmations on those trades that apparently did go through.

At least the plummeting of Facebook stock this week tends to disprove the theory that Friday’s selling was only a reaction to Nasdaq’s inability to process trades, right? But the counterfactual is unprovable. Had the company opened smoothly, maybe day traders would have piled in. Maybe the stock would have shot up and delivered the pop IPO investors expected.

You never know, but one thing is sure: Both Morgan Stanley and Facebook now have a chance to shift some of the egg that rightly belongs on their faces onto Nasdaq’s instead.

Morgan Stanley is in a service business too, and perhaps should be congratulated for pricing Facebook so attractively for Facebook, leaving little or nothing on the table. Hooray, a tech IPO done right, right? Then why isn’t anyone happy?

Morgan Stanley can’t be happy. It will have a harder time selling the next IPO to its clients, who’ve seen no profit from an expected first-day pop. The investment bank can’t be happy either if, as many suspect, it risked its own capital to buy up Facebook shares in the first day of trading to keep them from closing below the issue price.

At Facebook’s direction, the bank boosted the size of the offering and the price at the last minute. They got the $38 a share they were aiming for, but they wanted $38 and a pop for investors. Are they going to blame themselves for this failure? No, they’re going to blame Nasdaq.

Some say Facebook shouldn’t have gone public. The company didn’t need the cash. Founder and CEO Mark Zuckerberg obviously doesn’t crave having the public as his partner. He made a point of concentrating power in his own hands through the kind of voting rights lockup that corporate governance mavens think should be illegal.

These gripes are misplaced. The market is fully capable of putting a price on the varieties of corporate governance. And Mr. Zuckerberg bent over backwards to make sure public shareholders knew what they were getting into. That said, the rocky start to Facebook trading accurately foreshadows what was always going to be a stressful relationship between Mr. Zuckerberg and his public investors. How convenient at least to be able to blame Nasdaq for a messy wedding night.

There’s a reason companies from time immemorial have considered a successful IPO one that leaves money on the table so initial holders can enjoy a first-day pop. Companies want a record of managing and satisfying investor expectations. Establishing such a record was destined to be doubly hard for Facebook.

It’s clear Mr. Zuckerberg was eager to indulge the public’s readiness to attribute a $100 billion market value to the firm. He liked the idea of Facebook’s stratospheric valuation relative to any demonstrated ability to generate revenues or profits. He reportedly pushed Morgan Stanley to raise the issue price. But far from clear is whether he’s willing now to accept the public investors’ agenda and protect their money by shifting his focus to profit making.

…… And yet for the mom and pop investor everybody claims to care about, being shut out of the Facebook IPO was a blessing. They now get to buy the shares at a real price, flirting with $30, that turns out to be much better than the IPO price.

……The stock market is a place where capitalism gets done; it’s not capitalism itself. Mr. Zuckerberg may not be crazy about corporate governance regulation. He may not want a truly independent board or strong public investors breathing down his neck. All the more reason, then, to appreciate the feedback he gets from the stock price. If he keeps the stock market happy by building a profitable company, nobody will be breathing down his neck.

Overhyped IPO + overpriced opening stock = Oh shit, back up a minute. In spite of a little air being let out of the Facbook balloon, the Morgan Stanley underwiters still made $100 million, which puts some salve on the boo-boo. Other investors are suing over the ‘mishandling’ of the IPO,  because ‘NASDAQ delayed buy, sell, or cancellation orders for Facebook shares’.  Investing is a gamble and there are no guarantees.  These shareholders ought to know that. Don’t gamble what you can’t afford to lose.


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