Question of Fair Play Arise in Facebook’s I.P.O. Process from the NYTimes DealBook discusses how Morgan Stanley, Goldman Sachs, and other banks involved in the Facebook IPO “shared a negative outlook about Facebook with a select group of clients, rather than broadly with all investors.” In the days preceding the IPO the banks’ respective analysts lowered their estimates of Facebook’s growth after the company shared its quarterly and annual revenue projections.
As is typical in the I.P.O. process, research analysts at Morgan Stanley, Goldman Sachs and other firms contacted certain clients to discuss their revised expectations, while other big investors called on the banks to get their new take. But ordinary mom-and-pop investors did not have the same access to the valuable information.
The S.E.C. is investigating the Facebook IPO but what’s described above may not violate any laws: “research analysts are not obligated to share their work with the wider public. The rules governing the I.P.O. process allow analysts to confer with particular clients, as long as it is done in line with a bank’s longstanding policies.” Nevertheless, it shows how the game is rigged in favor of institutional investors, at retail investors’ expense.
I did not intend to post again about the Facebook IPO but Morgan Stanley’s $2.4 Billion Facebook Short persuaded me otherwise for its clear explanation of the Morgan Stanley greenshoe option, which involves shorting the IPO company’s stock. Felix Salmon explains how a greenshoe is supposed to work, the details of the Morgan Stanley Facebook greenshoe, and the circumstances under which the bank can make or lose money on it. Salmon concludes-
[s]o the chances are that at the end of the day, Morgan Stanley is going to end up pretty flat on its trade, selling the shares at $38 and then buying them back at $38. But if it bought more than 63 million shares on Friday, then it is sitting on a substantial mark-to-market loss right now. And similarly, if it bought back fewer than 63 million shares on Friday, then it’s actually making a profit on its greenshoe short.
(Thanks to WSH for sending the article’s link.)
Today’s first five stories from Eric Bedell’s This Web Day:
I don’t closely follow IPO’s, but I cannot remember the market and media turning on an initial public offering so quickly. Kicking the 800-pound billionaire gorilla may be entertaining, but this reaction bodes ill for other tech IPO’s in the pipeline.
Here’s an interesting tidbit from today’s NYTimes Dealbook article As Facebook’s Stock Struggles, Fingers Start Pointing:
Some institutional investors were also surprised by the size of their allocations, expecting to get far fewer shares. In the process of jockeying for I.P.O. shares, investors will typically ask for a large block, even if they expect to only receive a fraction.
“We got more shares than we expected, which spooked us,” said one portfolio manager, who spoke on the condition of anonymity for fear of upsetting Facebook’s underwriters. Concerned that the size of its allocation implied a lack of broad investor support, the manager sold all of the firm’s Facebook’s shares on Friday. “If it was truly a hot, hot deal, we would have gotten less.”
Some worthwhile analyses of why Facebook’s stock price has fallen below the float just a few days after the IPO:
- Roger Chen, CNET, Why Facebook’s stock is tanking–“Facebook just isn’t worth $100 billion . . . At $38, Facebook’s price-to-earnings ratio was more than four times that of Google’s 2011 PE ratio. That’s despite Google posting revenue and profit that were 10 times higher than Facebook . . . Apple trades at about 10 times its estimated earnings for next year, while Google has a price-to-earnings ratio of 12. Based on BTIG’s estimate and Business Insider’s own estimate, Facebook has a multiple of 40 to 100 times earnings.”
- MSNBC.com, After Facebook IPO debacle, finger-pointing begins—
- “Some pointed to underwriters offering too many shares, while others blamed an overly strong IPO price and worries about slowing revenue growth at the social network . . .
- Initial trading on the Nasdaq was delayed for half an hour due to issues with some orders . . . ‘This is arguably the worst performance by an exchange on an IPO — ever,’ said Thomas M. Joyce, chairman and chief executive officer of trading firm Knight Capital Group. ‘The failure was Nasdaq’s’ . . .
- [I]nvestment banks that arranged the offering overestimated the demand . . . ‘The late addition of 84 million shares to the offering overwhelmed demand, limiting the first day price’ . . .
- Robert Hof, Forbes, The Facebook IPO Was a Dud-Here are 3 Reasons it Matters–“[N]o pop at all the first day, besides a measly 23-cent rise–which only happened because Facebook’s underwriters bought millions of shares to keep it from going underwater? And today, a 9% 11% plunge? Can anyone really believe that’s in the best interests of Facebook, its employees, and its investors? . . . IPOs have always been a publicity event, and part of that publicity is at least a reasonable pop in the stock price the first day. A rational mind might wish it weren’t so, since that means money the company didn’t get, but that’s the reality of IPOs . . . So the perception of a blown IPO, even if it wasn’t blown in the financial sense, matters . . .
- It matters to Facebook employees . . . a flat to down stock price isn’t something that tends to keep the most ambitious people working long hours week after week.
- Prospective employees may look twice at working at Facebook.
- Valuations of other Internet companies just took a big hit.
As my Internet law students know from my recent classroom rambles lately I am focused–it sounds much better than obsessed–with exploring and defining the complex relationship between privacy, social media, and electronic data tracking. The issues are not new to me but something has ratcheted up my appetite for privacy stories, like this from the NYTimes about tensions that arise when one partner in a couple objects to the other partner’s public disclosures.
[S]ome spouses have started insisting that their partners ask for approval before posting comments and photographs that include them. Couples also are talking through rules as early as the first date (a kind of social media prenup) about what is O.K. to share.
“Talking through rules as early as the first date?” Do couples handle these conversations face to face or via text? I’m just wondering.
I just learned that I am the prototypical Google+ user. Comscore reports that in January the average user spent 3.3 minutes using Google+–that’s 3.3 minutes for the entire month, not each day. That is, I recall, exactly how much time I spent on Google+ in January: 198 seconds, staring at the screen, wondering what to do with it. However, I am not the average Facebook user, who during January spent 7.5 hours on that site.