Facebook IPO Mess Turning Into A Legal & Financial Circus As Morgan Stanley Agrees To Adjust Prices On Trades
from the wow dept
On Friday, after the Facebook IPO, we wrote a response to those who were complaining about the lack of a first day stock “pop.” While the press seems to love those first day pop stories, we’ve argued for well over a decade that such things are merely signs of a stock being underpriced by Wall Street, causing the company to leave money on the table that it should have received in exchange for its shares. As more details come out about the Facebook IPO, however, it looks like there were a bunch of other issues with the offering, and a big and lengthy legal mess is about to ensue. However, one thing I’ll stand by is the claim that the lack of a pop is a good sign, not a bad sign. In this case, though, it may actually have been part of the banks’ attempts to cover up the fact that they did the opposite of what they normally did: rather than underprice the deal, it sure looks like they overpriced it… and perhaps tried to cover up that information.
There was lots of talk about how the underwriters were propping up the price on Friday, suggesting weak demand for the stock at the IPO price (or above), and without that support this week, the stock has dropped. But there were significant other issues behind that, which came out in the past few days, including the somewhat astounding claim that the underwiters all learned that Facebook’s Q2 was looking worse than had been previously communicated, leading the underwriters to all drop their estimates in unison… but supposedly only informed a few large institutional buyers. Yikes. It’s somewhat insane that anyone thought they’d get away with that, and, of course, lawsuits have been filed and there are a bunch of government investigations kicking off, including from the Senate Banking Committee, the House Financial Services Committee and the SEC. I’m not at all confident that any of those will do a decent job of any of this… but it’s going to be tied up for a long, long time.
Separate from all of this were the technical “glitches” that caused the IPO to happen later than expected… along with claims that either trades weren’t being completed or the prices were higher than expected. On that front, Morgan Stanley has now admitted that it is going to comb through pretty much all of the trades and will make pricing adjustments… which is going to be pretty costly.
Felix Salmon’s recap suggests that absolutely everyone comes out of this looking bad. It’s just that kind of debacle. I do agree (somewhat) with Matthew Yglesias that blaming Mark Zuckerberg for not playing the Wall Street game is a little unfair, since Zuckerberg and Facebook actually made out nicely in the deal, apparently getting more cash for the equity they sold than what the market was valuing the company at. From a corporate standpoint, that seems like a good deal. Sell high, and all that.
You could make the claim that that’s a short-term view and in the long term, the fact that the IPO was so botched, and that Facebook may have walked away with quite a deal for the shares it did sell, may come back to haunt the company in other ways — in particular when it next decides to tap the capital markets. However, Wall Street can be quite forgiving if you can make it lots and lots of money, and while it’s certainly going to be a lot more careful in taking Facebook at its word going forward, a little skepticism and extra scrutiny on Wall Street isn’t necessarily a bad thing.