Ryan Chittum and Felix Salmon on the Facebook IPO Fiasco

“We’re starting to get a better picture of what happened with Facebook … in the run-up to its IPO, and it’s not pretty”–Ryan Chittum, The Audit

Best Business Writing Ryan Chittum, deputy editor of The Audit, the Columbia Journalism Review‘s financial wing, and Felix Salmon, the finance blogger at Reuters, are co-editors of The Best Business Writing 2012, and on Wednesday, they both wrote articles about the increasingly problematic Facebook IPO: “Facebook Fiasco” by Chittum and “Facebook: The List of Incompetents” by Salmon.

Neither are particularly impressed by the situation or by anybody involved. Chittum states that “we’re starting to get a better picture of what happened with Facebook on Friday and in the run-up to its IPO, and it’s not pretty,” and Salmon claims that “one thing’s already clear with respect to the Facebook IPO: absolutely no one has come out of it looking good.”

Facebook, of course, recently went public with a widely discussed stock market launch. The IPO initially generated a huge amount of interest in the media and the public, and, based on its initial public offering price of $38, Facebook was valued at around $104 billion at the time of the IPO. After just a few days of trading, however, the price per share dropped around five dollars per share. The major problem, however, is that some investors (a number of big investment banks, to be specific) seemed to be aware of the likelihood of the price drop before others. As Chittum explains:

It appears from what we know now that Facebook and its bankers selectively told big investors in the days before the IPO that the company’s outlook had dimmed but failed to tell mom and pop investors. That would be a serious problem if true.

Salmon, in his List of Incompetents, places a large portion of the blame for the disastrous IPO on the Facebook CFO David Ebersman:

Ebersman didn’t make one big mistake, he made three. Firstly, as CFO, it was his job to accurately forecast Facebook’s second-quarter figures, and give the company’s banks a good feel for where they would come in. He failed so badly that he was forced to re-file the IPO prospectus just days before the deal came to market, and to whisper in his bankers’ ears that they should probably cut their forecasts for the company’s revenues.

There’s no excuse for getting that wrong, but if there was an excuse, it would be that Ebersman was too focused on the year-long process of managing an awesome IPO. Ha! He screwed that up, too, of course — not least by upsizing the deal at the last minute, raising the number of shares being sold by 25%. In hindsight, that was a very bad idea. But then, after that, he made his third major mistake: he priced the deal for perfection, at $38 per share, even as big institutional investors — the only ones who knew about the new revenue forecasts — were saying that they had no real desire to own the stock at more than $32 per share. When you’re selling $16 billion of stock, the marginal price-setters are always going to be institutions, rather than price-insensitive retail investors willing to buy Facebook on name recognition alone. And those institutions were never really willing to provide a strong bid above $38.

Wall Street companies (Morgan Stanley in particular) and the Nasdaq itself also draw Salmon’s ire:

And then there’s the whole scandal of the buried revenue forecasts: the way that Morgan Stanley whispered the new numbers in select clients’ ears, without ever letting the broader investing public know about the downgrade. If you want to develop a reputation as an untrustworthy bank which plays favorites and leaves the little guy out to dry, you could hardly do so in a more effective manner.

Then, of course, there’s the Nasdaq. Read Nick Carlson’s interview with an anonymous hedge-fund manager for some of the gorier details here, but in general anything that Nasdaq could mess up, it did mess up. In short: the stock never opened at 11am, as planned, because Nasdaq’s computers weren’t up to snuff. There was a five-minute delay, and then there was a second, 25-minute delay, during which time Nasdaq switched over to a second computer system.

The whole thing turned into a complete disaster. The second computer system didn’t work as planned, and there was an enormous amount of confusion — which still hasn’t been cleared up, in some cases — about where and whether various investors actually managed to sell their stock. As a rule, if you placed an order between 11:05 and 11:30 on Friday, you’re probably in a world of pain today, and you might be relying on the Nasdaq to make you whole for your losses: while you thought you were selling at $42, you might not actually have been able to sell until the shares were at $38 or even less. It seems that the opening price of $42.05 was based only on orders received before 11:05, and ignored all orders after that time, most of which were at much lower levels. Which helps to explain the initial and chaotic plunge in the stock price.

Chittum doesn’t believe that it’s likely that anybody will even be charged with a crime, much less convicted, in the fallout from the Facebook fiasco. However, he does think that this shows an ugly side of Wall Street and of venture capitalism:

Regardless of whether anyone committed a crime, much less gets charged for one (don’t hold your breath), this ugly episode has shown very clearly how Wall Street, tech companies, and the venture capitalists who back them have been trying to inflate another bubble to enrich themselves….

If you were one of the suckers who bought at the open on Friday, you lost more than a quarter of your money in less than three trading days.

Salmon agrees that everyone involved, including the investors, came out of the IPO looking bad:

All of which means that the winners in this whole game were you and I: the quiet skeptical masses who simply sat back and watched the farce unfold. In the game of Facebook IPO, it turns out, the only winning move was not to play.

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