Tag Archives: IPO

Mad As Hell! And, See You In Court.

That didn’t take long.

Facebook Inc and Morgan Stanley, the lead underwriter of social networking company’s IPO, were sued by shareholders who claimed the defendants hid Facebook’s weakened growth forecasts ahead of its $16 billion initial public offering.

The lawsuit also names underwriters JPMorgan Chase and Goldman Sachs among others, and follows quickly on the heels of Facebook’s May 18 stock market debut, which was plagued by technical glitches.

Facebook shares fell 18.4 percent from their $38 IPO price in the first three trading days. In early afternoon trade today, Facebook shares were up 2.1 percent at $29.51.

Hey, I just lost $2 Billion. Don’t bug me with your problems!

The legal action accused the defendants, including Facebook Chief Executive Mark Zuckerberg, of concealing “a severe and pronounced reduction” in revenue growth forecasts resulting from increased use of Facebook’s app or website through mobile devices.

Facebook was also accused in the lawsuit of telling its bank underwriters to “materially lower” forecasts for the company.

“The main underwriters in the middle of the road show reduced their estimates and didn’t tell everyone,” said Samuel Rudman, a partner at Robbins Geller Rudman & Dowd, which brought the lawsuit. “I don’t think any investor in Facebook wouldn’t have wanted to know that information.”

Regulators including the U.S. Securities and Exchange Commission, the Financial Industry Regulatory Authority, and Massachusetts Secretary of the Commonwealth William Galvin have begun looking into how the IPO was handled. The U.S. Senate Banking Committee is also reviewing the matter. Busy, busy, busy. Let no self-respecting agency appear as though they aren’t busy looking into things. Problem: Horses are already gone. 

“The SEC has since the 1990s broadly condemned the trickling out of material non-public information, which would include that savvy, well-paid analysts are lowering estimates,” said Elizabeth Nowicki, an associate professor at Tulane University Law School and a former SEC lawyer. Condemned? Or, is it actually against the law?

Syndicate banks “are on the hook in terms of liability by not making accurate, complete disclosure,” she added. “Selective disclosure of analyst outlook changes is not acceptable.” Not acceptable? Or, against the law?

Andrew Noyes, a Facebook spokesman, said: “We believe the lawsuit is without merit and will defend ourselves vigorously.”

Andrew Noyse.

Morgan Stanley had no comment. It said on Tuesday that Facebook IPO procedures complied with all applicable regulations, and were the same as in any initial offering.

The shareholders said the disclosures about Facebook’s business risks were inadequate, and that the company should have told everyone, not just “preferred” investors, that analysts knew those risks and cut their business outlooks accordingly.

Should have? Or, were they bound under the law to disclose to everyone?

 

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Mad As Hell!

I have been around the technology markets for a really long time, and I have never seen this happen before:

It appears that that Facebook‘s lead underwriters, Morgan Stanley, JP Morgan, and Goldman Sachs, all cut their earnings forecasts for the company in the middle of their IPO roadshow.

Worse, if possible, is the fact that the revised earnings forecasts were only passed along to a small group of major (important) investor clients, and not made public.

This is a huge problem.

As you might imagine, the lead underwriters are the most privileged insiders on any deal that is preparing to go public, and they have the best insight into the financial data and associated facts about the health of their client’s business. The earnings forecasts are material information and are prepared by these same analysts employed by the lead underwriters, and as such, are the foundational facts upon which the investing public places their trust. If it turns out that these analysts lied and their employers endorsed these lies, then what does that mean about the system upon which tens of millions of investors have depended for accuracy and integrity?

So, now the apparent truth about Facebook’s lackluster IPO would seem to suggest that news of these estimate cuts dampened interest in the IPO among those who heard about them. (Reuters reported exactly this—that some institutions were “freaked out” by the estimate cuts, as anyone would have been.)

During the road show that was selling (sorry, that’s what it is) the Facebook IPO, investors who didn’t hear about these estimate cuts were placed at a serious and critical information disadvantage. What they didn’t know cost them hundreds of millions of dollars.

Yes. This is a direct violation of securities laws. Privileged information selectively disseminated is a major league no-no. I assume the SEC is on this like, well you know.

What might have actually happened?

One possibility is that the underwriter analysts cut their estimates after a late amendment filing to Facebook’s IPO prospectus, in which a vaguely worded mention that indicated users were growing faster than revenue was a trend, and it appeared to be continuing into the company’s second quarter.

This language freaks out people who are used to reading filing documents, because it could easily have been taken to mean that Facebook’s revenue in the second quarter wasn’t coming in as strong as Facebook had hoped (why else would the language have suddenly been added at the 11th hour?)

Another possibility is that Facebook told the underwriters to cut their estimates—either by directly telling them to, or, more likely, by “suggesting” that the analysts might want to revisit their estimates in light of the new disclosures in the prospectus.

If there was any communication at all between Facebook and its underwriters regarding the analysts’ estimates, Facebook will have to answer for this.

Based on the actual language, it seems highly unlikely to me it would have prompted all three underwriter analysts to immediately cut estimates without some sort of nod and wink from someone who knew how Facebook’s second quarter was progressing. (To get this message from the language, you really have to read between the lines).

At the end of the day, privileged information was known to the lead underwriters and only disclosed to a few, important clients. As a direct result, Facebook’s IPO performed poorly and a lot of investors lost a lot of money, including Mark Zuckerberg, who is $2 Billion lighter today. This practice should be against the law and the lead underwriters should be severely punished. The SEC must regain control of this process and enforce strict oversight rules. The investment community should be outraged. Mary Schapiro should be fired!

Yes, Mary, it’s THAT big.

We’ll soon see how the SEC reacts, and what Congress has to say about all this. Maybe we’ll finally get to see who on Wall Street owns whom in Washington, and what the American people are actually made of.


The Wrong Day to Quit Sniffing Glue or to Make Your IPO Debut.

And now, with permission from my buddy Dara Albright, Founder of NowStreet Journal, we have her insight to the FB IPO:

Some call it a cultural phenomenon. Others label it a colossal waste of time. No matter the sentiment, all attention was on Facebook’s IPO entrance on Friday. Well, except for NASDAQ, who was too focused on repairing its malfunctioning technology, oh, and the European Union, who was busy worrying about its looming financial collapse.

Instead of skyrocketing, as was widely predicted among analysts on the Street, Facebook closed up a mere $0.23 cents, not even gaining 1%. News circulated during the day that even Facebook’s bankers had to jump in and support the stock from breaking its offering price. A far cry from LinkedIn’s IPO entrance, almost exactly one year ago, which nearly tripled its offering price during its first trading day.

The most anticipated IPO of the decade and largest technology offering in history had a less than stellar IPO debut. Yikes. What does this say about America’s capital markets? What does this mean for its economic future?

If we’ve learned anything today, it’s that timing is everything and no one, not even Wall Street’s finest, can predict the ideal day to go public. Sometimes you just “pick the wrong day to quit amphetamines”. But, bankers can sometimes price an offering correctly. And this was one of those times. Had Facebook’s stock price shot through the roof, Friday’s headlines would have read something like, “Once Again Wall Street Bankers Underprice a Deal & Screw the Issuer”.

Facebook’s underwriters should be commended. But I do not want to give them too much praise for fear it will go to their heads and result in the creation of yet another destructive derivatives product. “There’s no reason to become alarmed, and we hope you’ll enjoy the rest of your flight. By the way, is there anyone on board who knows how to fly a plane?” Sorry, once you start quoting the movie, “Airplane”, it is almost impossible to stop.

Facebook’s lackluster IPO performance also affirmed what we all know but most don’t like to confront – the public markets are significantly broken. It is challenging for companies to thrive in a trader-centric marketplace where fundamentals are rendered practically meaningless and company stock prices are at the mercy of extraneous events. Last week, Europe sneezed and Facebook caught the flu.

Unfortunately for Facebook, not too many traders came to the realization that Europe’s bleak financial future and rising unemployment actually benefit Facebook’s business. Look how many more jobless people will now have time for Facebooking. Does anyone see the irony here?

Facebook, say goodbye to the autonomy of the private markets. Now, instead of being valued on your own merits, you’ll be assessed based on the accomplishments and failures of those who have nothing to do with you, subject to the second-by-second mood swings of those judging you. Welcome to public market hell where you will now be viewed as a ticker symbol as opposed to the global innovator you are.

Don’t worry, “FB”, many considered the IPO of “GOOG” to have been a great disappointment too. Contrary to “GOOG”, at least you were not forced to slash the price and size of your offering. And remember Webvan’s hot IPO? Its stock price more than doubled during its first trading day. Perspective.

So just where was Facebook’s aftermarket love on Friday? This leads me to the final and most important lesson of the day. Even the most grandiose of companies have trouble thriving in a marketplace that lacks the aftermarket support derived from long-term investors who are more interested in funding companies rather than trading tickers. These long-term investors are a company’s clients, its customers, its users, its partners and its supporters. In Facebook’s case, they are the 900 million across the globe sharing updates, photos and videos every day. If each user bought just one share of FB, it would equate to $34.2 billion in pent up demand.

I don’t doubt that Facebook will ultimately achieve success in the public markets. It is one of maybe a handful of companies on the planet, including AAPL and GOOG, who can provide its own aftermarket support by harnessing the crowd. According to Gene Massey, CEO of MediaShares and leading expert in Direct Registration methods, “Once Facebook has been public for 12 months, it can offer a direct stock purchase option to its massive user base. By doing so, it will not only gain stock support, but Facebook will also add valuable shareholder demographics to its existing database enabling it to become the world’s most powerful marketing and fulfillment company in history.”

Unfortunately, the vast majority of companies entering the treacherous public markets do not have a support group of 900 million. Unless something is done to fix the aftermarket deficit, more and more publicly traded companies will find themselves dying a slow painful death. This will only result in additional long-term investors fleeing the public markets in search of greater stock appreciation.

The fact is the mass exodus has already begun. The fastest growing companies no longer reside on NASDAQ. They are found in the rapidly expanding marketplace for private company stock (PCM).

Facebook has inspired a new generation of social businesses poised to capitalize off its extraordinary media platform. Many of these micro and small cap companies are already enjoying spectacular revenue growth. Historically, most of these companies would have been public at this point in their life cycle, creating wealth for public market investors. However, it makes no fiscal sense for these companies to be public today.

These private companies are all thriving, in part, because their investors consist of long-term shareholders who believe in their products, their businesses and their visions. Don’t all companies deserve the right to attract investors whose interests are more aligned with their own? Shouldn’t all investors have the opportunity to invest prior to a company’s greatest growth spurt? Shouldn’t all investors have the freedom to invest their own money as they see fit?

224 days, 16 hours, 38 minutes, 16 seconds until the democratization of the US capital markets.


Why Mark Zuckerberg Shouldn’t Listen to Management Gurus.

This is why Mark Zuckerberg was smart to stay in complete control of Facebook and not listen to anybody telling him that a multi-billion-dollar company needed a seasoned, professional CEO in charge.

Jack and Suzy Welch are onto something when they diagnose a potential class problem at Facebook, post-IPO.

“After its IPO, Facebook is going to have two classes of citizens. That’s just reality. Some of its 3,000 or so employees — several hundred in number by some counts — will have significant riches in the hand. Newer hires, though — well, they’ll mostly have options in the bush.”

Where they go hilariously wrong is in their proposed solution to the problem. There’s a carrot, which as far as I can tell involves Silicon Valley manager-geeks suddenly transforming themselves into conventional business people. And then there’s a stick:

“With all this exultant “barking,” there also needs be bite — in the form of frequent, rigorous performance reviews. The facts are, if Facebook wants urgency, speed and intensity around its mission, those behaviors must be explicit values that, when demonstrated, result in bonus money and upward mobility — or not.”

Any company, in the wake of an IPO, finds itself growing new and previously-unnecessary layers of management, especially in areas like the general counsel’s office, investor relations, and public relations. But for the Welches, that’s not enough: extra management also has to be marbled throughout the organization, to be found everywhere as “frequent, rigorous performance reviews”.

There is absolutely zero evidence that frequent, rigorous performance reviews ever do any good, and quite a lot of reason to believe that they actually do harm. And what’s true of business professionals in general is especially true of Silicon Valley engineers — a culture where pretty much everybody knows exactly who’s hot and who’s not, without any need for formal, frequent, or rigorous performance reviews.

What’s more, it’s far from clear that the best way to motivate a Silicon Valley engineer is to dangle an annual bonus in front of his face and tell him that if he works hard he could get an extra couple of months’ salary at the end of the year. Rather, the best way to get the most out of engineers is to surround them with other great engineers, in a collegial atmosphere where everybody works hard and everybody does really well building great products that everybody is proud of.

Performance reviews are horrible, divisive things which create a whole other set of class distinctions within a company, between the “high performers” who get money and promotions and the grunts who live in fear that their review will be used to punish or fire them. (And of course if bonus-greed isn’t a great motivator of computer engineers, fear is even worse, especially in the context of Silicon Valley, where there are multiple jobs permanently being dangled in front of just about anybody who can code.)

Managing a company like Facebook is all about creating a magnetic culture — a place where employees love to work, and where they’ll tell their friends that they’re having a great time and that they should come join them. Meanwhile, there has never been a company in the history of capitalism where managers really love the performance-review process and tell all their friends that they would hugely enjoy going through it themselves on a frequent and rigorous basis.

In other words, the mere existence of such things would probably be enough to put off many talented potential employees with a wide choice of possible employers. At a company like GE, a CEO like Jack Welch tends not to worry about such things. But at Facebook, the ability to continue to attract Silicon Valley’s best coders is very high up Mark Zuckerberg’s list of priorities and concerns.

Which is reason number 100 Billion that all of Facebook’s shareholders should be very happy indeed that the company is being run by Mark Zuckerberg and not by Jack Welch.