The selling shareholders have been the only beneficiaries in the Facebook IPO. Almost all other parties to the transaction have experienced some damage that can be divided into three broad categories: financial losses, reputational issues, and market upheaval.
Losses. The most obvious problem with the FB IPO is that a huge number of investors lost nearly $50 billion to date. Few were spared the inglorious experience of buying high and selling low. Only those that were allocated shares in the IPO and a small group of investors who bought shares at the opening and flipped them were able to get out whole, or close to it. The deal epitomized the old saying that smart money sells into an IPO and dumb money buys into it.
Regarding the latter, it appeared that the underwriters were unable to build a large order book for FB stock and needed to bring in retail buyers to fill the gap. Even before the IPO closed, institutional investors smelled a rat and cancelled orders. Retail clients have been crying foul ever since their euphoria upon being allocated IPO shares.
Reputation. Morgan Stanley was the lead underwriter responsible for pricing and sizing the FB IPO, building an unprecedented book of orders and stabilizing the market. By most accounts, the firm gets low marks in these regards. The offering was priced at the high end of the proposed range having been increased on the heels of a weak book of orders, downward reforecasts by analysts, a cancelled order by General Motors for advertising, and a huge issue relating to the impact of mobiles on future FB revenues. Morgan Stanley has vigorously defended its performance, mostly by falling back on the success of the IPO for FB, or getting the highest possible IPO price. Most believe that the selling shareholders, not FB, were the exclusive winners. Keep in mind, very little proceeds benefitted the company; this compares to the Google IPO, where almost all of the proceeds went on to the company’s balance sheet.
NASDAQ has been widely criticized for its role in the IPO. On Wednesday, the NASDAQ chief defended his company’s performance. It was a futile effort, as FB shares opened late and confirmations were not received until several hours into the trading day. This event exacerbated the situation, as many clients were confused about the prices and number of shares they received. NASDAQ has already set up a “fund” to compensate those investors who lost money because of NASDAQ’s issues. Incidentally, almost everyone believes that the fund is tens of millions of dollars short of what would be needed to reimburse brokers and their clients for losses.
FB’s reputation has been besmirched as well. The sloppy IPO process was a direct result of the pressure FB put on its underwriter to maximize the IPO price. Frankly, the selling shareholders were too greedy. The rapid decline of the stock price after the offering is indicative of how far off target the price was. All this, coupled with billions of dollars of losses, will make future secondary offerings difficult for FB, its employees and insiders. And, the company’s silence relating to all the aforementioned criticism has been deafening.
The Market for IPOs. The IPO process has been around for decades. Trillions of dollars have been raised over the years enabling thousands of U.S. companies to grow and prosper. The market for IPOs has been turned upside down by the FB IPO. All procedures, due diligence and underwriting methods must all be reviewed and reconsidered. The impact of this will, no doubt, delay the efficient operation of the new issue marketplace. Companies that need money will have to wait and will likely receive much lower proceeds because the FB deal has been such a debacle.
No parties to the FB IPO will escape scrutiny. The underwriters, the brokers, the attorneys, the stock exchange and the investors will all be examined and criticized. The vetting process and the attendant litigation will take many months if not years to complete.