NEW YORK May 24 It's been less than a week since
Facebook went public, and while the IPO made CEO Mark Zuckerberg
and many others very wealthy, the botched way in which the
offering was done has sparked investigations, lawsuits and
regulatory threats. It has also sparked a lot of anger toward
the social media company, lead underwriter Morgan Stanley and
the Nasdaq stock market.
Here is a list of eight things that went wrong with the
Facebook IPO - a "what not to do list" for the next big
technology company considering a public listing, compiled from
interviews with investors, traders, analysts, attorneys and
1. Charge too much. Facebook raised the price of its shares
above a reasonable valuation given its earnings and revenue.
The $38 price tag was 100 times historical earnings. By
comparison, Apple Inc trades at 14 times historical earnings,
while Google Inc is at 19 times. Facebook set the higher price
despite a slowdown in recent months in its online advertising
business and its concerns about the growing use of mobile
devices, an area in which its advertising revenue is still weak.
2. Sell too much stock. Facebook floated 421 million shares
worth around $16 billion at the offering price -- the biggest
ever U.S. technology company IPO. As soon there were some
wrinkles, supply overwhelmed demand. Many bankers were
especially concerned that Facebook demanded that a larger than
usual block - about 25 percent - be set aside for ordinary
investors, who typically are more willing to flip their purchase
in the hope of a quick profit.
"The underwriters misjudged the amount of buy and hold
demand relative to the amount of speculative demand," said Jay
Ritter, a finance professor at the University of Florida, in
Gainesville, Florida, who plans to hold on to the 400 shares he
bought in the IPO.
3. Fall for the hype. Facebook, Morgan Stanley and others
believed the hype -- some of it self-generated -- that the
company's shares would pop 30 percent to 50 percent on the first
day of trading, and miscalculated the demand. The event was "a
perfect storm," according to J. Robert Brown Jr., a law
professor at the University of Denver Sturm College of Law in
Facebook increased the number of shares at the last minute
while bad news was coming out. Then delays in the start of
trading on Nasdaq and later disruptions in matching buy and sell
orders "gave some shareholders time to reconsider and cancel
their orders," Brown said in an email. "All of this resulted in
less demand and a dropping share price."
4. Selective Disclosure. Even if Morgan Stanley and other
underwriters didn't do anything illegal, they weren't upfront
about what they knew about the company and whom they told.
Morgan Stanley and at least three of the other underwriters
lowered their forecasts for Facebook's second-quarter and
full-year revenues -- but the bad news reached only a small
group of big clients. Smaller investors had no idea until the
figures were revealed by Reuters several days after trading had
The company and Facebook have denied any wrongdoing, but
regulators and lawmakers in Washington have opened inquiries and
reviews, and some shareholders have sued Facebook and Morgan
Stanley. "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 on Wednesday. "I don't think any investor in
Facebook wouldn't have wanted to know that information."
5. Have a distracted CEO. Some investors are asking whether
Facebook CEO Mark Zuckerberg was on top of the whole process
enough given the many thousands of investors who were about to
buy a slice of his company. He appeared in New York at the
company's investor road show in his trademark hoodie, failed to
appear at some other road show events, and declined to hold a
ceremony at Nasdaq's main New York site in Times Square for the
listing debut. He was also busy planning his nuptials -- his
wedding to long-time girlfriend Priscilla Chan occurred one day
after the IPO.
6. Don't plan for the worst-case. Nasdaq CEO Robert Greifeld
partied last Friday with Zuckerberg while the bell was rung at
Facebook's Silicon Valley headquarters to kick off trading --
but at just that time a major crisis was brewing back east at
Nasdaq's sites. Technical glitches delayed Facebook's debut by
30 minutes and many buy and sell orders for hours afterwards.
Nasdaq said on Wednesday that it made the wrong fix for a
technical glitch, worsening the initial problem.
The exchange now faces big claims for compensation from
traders. "If we had known that our solution was inadequate, we
would have fixed the solution with the right solution before
moving forward," said Eric Noll, Nasdaq's head of transaction
services. The U.S. Securities and Exchange Commission is now
reviewing the matter, and at least one lawsuit has been filed
accusing Nasdaq of negligence.
7. Avoid the Google road. Facebook sold its shares through a
traditional Wall Street IPO - which is a more subjective process
because it's managed by the investment bankers. By contrast,
when Google went public in 2004, it issued stock through a more
transparent -- and democratic -- process known as a modified
Dutch auction. Underwriters gathered bids from investors
regardless of their connections or size of their portfolios.
8. Alienate your customers. For a company that transformed
the meaning of the words "like" and "friend," the events of the
last week weren't so friendly. The biggest U.S. automaker,
General Motors Co, said only days before the IPO that it
would stop buying ads on Facebook. The decision followed
Facebook's failure to convince GM about the benefits of Facebook
in a meeting in recent weeks, people familiar with the meeting
Then the IPO problems managed to upset thousands of
investors who are also Facebook customers. In a sign of the
image problems it has created, the headline on one New York Post
column on Thursday was: "Warm, Fuzzy Vultures," and a cartoon in
the same newspaper depicted a distraught bull slumped over a
computer featuring a Facebook page thinking the worst -
"unfri end, unfrie nd, unfriend, unfriend, unfriend. "