Yesterday over drinks, we asked an angel investor if he thought Gilt Groupe would actually go public this quarter or next year, as planned. Fat chance given the post-Facebook IPO market, he replied. (Stronger language was used.)
Today, Bloomberg offers a must-read, in-depth investigation into just how cynical Facebook was in the lead-up to the IPO, including obscuring material information on risks demanded by the Securities and Exchange Commission. Those vulnerabilities, such as difficulties in monetizing mobile, decelerating revenue and dependence on Zynga, became painfully evident to shareholders who have watched what was supposed to be “the IPO of the Century,” drop in share price from $38 down to $19.69 as of this afternoon.
Lest you think it’s merely the vagaries of the public markets, Bloomberg outlines how Facebook’s pricing structure played into that (emphasis ours):
Despite the cautionary signs, on May 15 Facebook and Morgan Stanley executives raised the asking price to a range of $34 to $38 from $28 to $35. A day later they also increased the number of shares being sold by 25 percent to 421.2 million. That was an effort to create a stronger buffer against a price decline in August when insiders and early investors were allowed to sell their stock, said one person familiar with the matter. The lock-up period was for only three months, unusually short compared to the average six months.
Some of the culpability lies with the SEC–specifically, the agency’s policy that that makes a company “responsible for its own disclosures,” which allowed correspondence from the SEC demanding answers about risks to go unpublished until a month after the IPO.
A dozen letters, published a month after the May 17 IPO on the SEC’s website, depict a management team hesitant to disclose information and still guessing at even rudimentary aspects of its business just weeks before the company held the largest-ever technology initial public offering.
Of course Facebook’s decision not to delay the IPO after significant, last-minute changes in forecast was “almost unprecedented,” analysts told Bloomberg.
There was also the hysteria leading up to the IPO. In July 2011, trading on SecondMarket suggested that Facebook had a market cap of $85 billion. Its current market cap is $42.2 billion.
While the SEC continues to conduct an “in-depth review of all the participants” in the IPO to determine if anyone left out or lied about material information, Bloomberg has outlined some of its known sins against shareholders.
In one instance, Facebook cited Nielsen as a source for statistics about social ads that actually came from Facebook’s marketing materials. And it wasn’t until an ultimatum from the SEC that the reference was removed. Then, in addition to Facebook’s troubling uncertainty over the number of mobile users (the SEC noted that they were counting some users twice, putting total user count into question), Facebook also seemed clueless as to where in the world their users were coming from:
“The company counted as Canadian many BlackBerry users around the world because the servers are based in Canada.”
But the most egregious manipulation–as Bloomberg covers in great detail–involved who was told what and when, bringing us back to the impact of Facebook’s IPO on the overall market. On May 9th, the same day Facebook released a “pivotal” disclosure “to investors cautioning about the growth in mobile users exceeding growth of ads,” Zuck, CFO David Ebersman, and COO Sheryl Sandberg were on the road show hyping the stock. Meanwhile:
Investor relations staff at Facebook began placing a battery of calls to equity analysts with a dour warning: sales for the second quarter and full year wouldn’t likely match its earlier guidance, according to people familiar with the situation.
Analysts adjusted their forecasts down and shared them verbally with their firms’ institutional clients, whose demand for the stock sagged as a result, people with knowledge of the matter said on May 10. Sharing that information only with institutions isn’t unusual, and it’s legal as long as they don’t do it in writing.
But it wasn’t just institutions who were investing.
Yet Facebook wanted the larger retail allocation to let its users take part in the IPO, the person said. In the end, 25 percent of the shares sold at the IPO were allocated to retail investors, other people have said. That exceeds the average amount of 15 percent.
It should have been enough to delay the IPO, Luigi Zingales, a finance professor at the University of Chicago’s B-school, told Bloomberg.
Still, said finance professor Zingales, “The fact that some institutional investors got access to a company’s information that was not available to ordinary investors creates the perception that there are two sets of rules and increases the mistrust in the market.”
So who emerged unscathed from this mess? Take a guess.
There were no headaches for investors who bought equity while Facebook was still private and were able to sell at the $38 IPO price. Goldman Sachs sold 24.3 million shares, which raised $924 million at the IPO price, doubling its original investment. Greylock Partners made 18 times its initial investment, selling 7.6 million shares for $289 million. Microsoft sold 6.6 million shares, which raised $249 million, more than quintupling its initial stake.
Stay tuned for more fallout later this month “when holders of more than a billion shares, many of them employees, will be permitted to sell.”