Facebook IPO Fiasco Rolls over Small Investors: The 3 Problems

Facebook IPO Fiasco: It’s Not the CFO’s Fault

The Daily Ticker’s Aaron Task and Henry Blodget discuss the controversy surrounding Facebook’s IPO

After Facebook’s initial public offering last Friday the finger pointing has been rampid with a disproportionate level of attention focused on the social media giant’s Chief Financial Officer David Ebersman. The CFO was responsible for the decision to increase the number of shares offered to investors by 25% just days before the IPO.

According to The Wall Street Journal , “That decision by the 41-year-old Facebook executive may have doomed any real chance the social-networking company had that its stock would jump on its first day of trading—a hallmark of successful IPOs.”

As the Facebook IPO rapidly becomes a public-relations and legal nightmare for the company and its Wall Street underwriters, there are legitimate complaints to be made, but placing blame on the CFO seems not to be one of them.

The Problems with the Facebook IPO

What frustrates investors the most are the 3 aspects of the IPO which was hyped as the deal of the century.

Facebook IPO: Problem 1

This was a very legitimate complaint, where NASDAQ’s computer systems failed on the morning of the deal. Many investors were left unable to place or cancel stock orders and could not retrieve information about whether their orders had been executed. This so-called “glitch” seems to be one that has caused some investors to lose money on Facebook’s IPO.

Facebook IPO: Problem 2

The second complaint is that Facebook’s stock did not “pop” as much as expected on the first day of trading as many were led to believe. Less sympathy is given where investors already go into this type of speculative investment knowing nothing is good as guaranteed on “hot IPOs”. Investors view IPOs as a way to pick up some free money based on hype and expectations so underwriters do a better job for their clients when they price their stocks just under the prevailing market value. In Facebook’s case, this initial market value was about 10% above the IPO price, or $42, which is plenty of “free money” for investors. The stock now trades at 27.10 +0.79‎ (3.00%‎) Jun 8 4:00pm ET

Facebook IPO: Problem 3

In recent revelations, the large sophisticated institutional investors were privy to certain information about the current condition of Facebook’s business than what the average small investor did. This may have played into the only modest “pop” in the stock when it began trading and also led to what would be long-term institutional investors to dump Facebook’s shares, consequently resulting in a decline in the price of the stock.

The information that big institutions were given was estimates for Facebook’s future performance, which were developed by the underwriters’ research analysts. As a result of this estimate cut, combined with an increase in the size and price of the deal and the number of shares sold by insiders, some institutional investors (which may include Mark Zuckerberg) “got the willies” about the Facebook deal. Individual investors, meanwhile, were unaware that anything had changed.

Facebook’s lead underwriter, Morgan Stanley, said that it had followed the rules and although it may have those rules themselves are grossly unfair. Those rules allowed the institutional investors to learn just before the IPO that Facebook’s business had deteriorated, while smaller investors were left thinking everything was ok and according to schedule.

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