Facebook lessons: What not to do when planning an IPO
Written by Reuters Friday, 25 May 2012
NEW YORK (May 25): It's been less than a week since Facebook went public, and while the initial public offering (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 regulators.
1. Charge too much. Facebook raised the price of its shares above a reasonable valuation given its earnings and revenue. The US$38 (RM120) 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 US$16 billion at the offering price — the biggest ever US 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% — 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% to 50% 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 Denver, Colorado. 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 begun. 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 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 City 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 City 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 US Securities and Exchange Commission (SEC) 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 US 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 said. 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 — "unfriend, unfriend, unfriend, unfriend, unfriend". — Reuters
Written by Reuters Friday, 25 May 2012
NEW YORK (May 25): It's been less than a week since Facebook went public, and while the initial public offering (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 regulators.
1. Charge too much. Facebook raised the price of its shares above a reasonable valuation given its earnings and revenue. The US$38 (RM120) 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 US$16 billion at the offering price — the biggest ever US 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% — 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% to 50% 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 Denver, Colorado. 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 begun. 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 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 City 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 City 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 US Securities and Exchange Commission (SEC) 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 US 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 said. 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 — "unfriend, unfriend, unfriend, unfriend, unfriend". — Reuters
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