Friday, May 25, 2012

BFF: Ballad of the Facebook Fiasco

Countless individual investors, and some intrigued "average Joes" thought that the Facebook IPO was going to be the atom bomb of Silicon Valley. The Golden Egg of the privately held tech companies, and its fearless leader, Zuckerberg, was sure to deliver. As the highly anticipated IPO jettisoned into history, as being the most anticipated offering of the millennium - I too thought FACEBOOK would be the IPO not to be missed. "get in now", I thought, "or you will regret it". Of course, I truly expected that the offering would be priced in the mid-teens, $13 or $15 per share. At the very least, it would be priced at a level commensurate with the "value", of a company that has no PRODUCT, who depends solely on Advertising. Advertising as a revenue source is not at all bad, but when you take into consideration that revenue growth on an ongoing basis would mean continued popularity, increased memberships and usage. Now, therein lays the rub. Allow me to offer MySpace into evidence, as how quickly a popular "hang out" can just as quickly shift into decline. MySpace, which was somewhat of a pioneer, is now valued at approximately $1 million, and struggling to stay relevant. That said, the pricing geniuses at Morgan Stanley had to be confusing FB stock with a commodity; you know... one of those limited resources that the world could not do without. How else would you explain a $38 opening price.

When a new popular issue is priced in the teens, it has no place to go but up. Sure it would fluctuate during the course of the day, but normally it would wind up quite a bit higher than the initial price. On the other hand, if you come into the market at $38, you are already at a premium, there is no place to go but down. Of course the speculation as to why the issue was priced so high, created underlying tension and uncertainty. By the end of the following day, reports of unethical matters surrounding the handling of the new issue began to surface. What a Fiasco this turned out to be! A sad, and bitter reality hit as news broke of possible insider trading. It is alleged that the lead bankers handling the FACEBOOK account at Morgan Stanley had tipped off their clients with confidential information. This information was in essence a warning not to purchase the stock at the opening price. Was this a setup, designed specifically to make million on the short sale of Facebook shares. An article in Business Insider reported that Morgan Stanley provided a select few classified information about FACEBOOK's weaker than expected forecast. Within 48 hours, news circulated of an SEC and FINRA investigation into what really happened. Whatever the case, Finance Reform obviously didn't go far enough.

Selective dissemination of "material" information concerning a cut in forecast estimates for the company would cause institutions to lose interest, which generated investor uncertainty among the small investors who weren't privy to this insider information. From the savvy individual investors, down to the average Joes jumping in to get a piece of the Facebook pie, this scandal put investors at an unfair disadvantage. The whole matter created a unprecedented IPO fiasco, leading to untold losses, and a decline of market confidence, which we could have done with out.

Adding insult to injury, Nasdaq had a fair share of technical problems which only added to the mayhem. Thousands of trades were stuck in limbo for individual investors. This may actually be a blessing, giving them the opportunity to either pick up shares at a steep discount, or back out completely. Ultimately, FB shares ended up about 30% lower than its initial price, with occasional ticks upward and downward. We're not likely to see stability in this stock price until the dark cloud of confusion is lifted, legally or otherwise.

My plans to purchase a hand full of shares immediately fizzled when I heard the price. A conversation with a few hopelessly optimistic friends convinced me that I should go ahead and pick up a couple shares just to be a part of the historic IPO. I never expected it would become the Fiasco of the decade.

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K Reilly
The Cohn-Reilly Report

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