What a piece of work is a man, how noble in reason, how
infinite in faculties, in form and moving how express and
admirable, in action how like an angel, in apprehension how like
a god! the beauty of the world, the paragon of animals—and yet,
to me, what is this quintessence of dust? Man delights not me—
nor woman neither, though by your smiling you seem to say so.

-Hamlet, Act 2, Scene 2

 

Ahhh, the delicious cruelty that is irony! The ineffable loss, the sadness at the sudden realization that this was your own doing — an easily preventable mistake, that harsh painful sensation in the pit of your stomach when you realize that you have no one to blame but yourself . . .

Our story so far: Facebook, a wildly overvalued momentary internet phenomena led by an arrogant 28 year old man-child, decided to treat the process of going public with the same respect they do their users’ privacy, which is to say, with none at all. So they went public more or less unlawfully over the past two years, allowing 1000s (or more) outside investors to acquire substantial stakes via secondary markets from their employees and early investors. Note this is within the company’s control, and could have been stopped, but they elected not to do so. When the clamor to dump shares overwhelmed these markets (but not the hype surrounding them), FB decided to do what was described as an IPO, but was in all actuality a secondary.

Flattered and cajoled by the bankers and wankers at Morgan Stanley and Nasdaq respectively, the man-child allowed the Facebook secondary to be bungled by these once-great-now-shite financial firms.

How?

Let’s begin with Morgan Stanley, who wildly over-priced the offering price (and size) by about 4X. They were hemmed in by the inefficient, opaque, clumsy secondary markets that had originally over-priced FB’s shares. Forget $25B, had Morgan Stanley told the man-child and his team that a $40-50B cap was more than reasonable, they would not have gotten the deal. Hence, the once esteemed bankers, down from $100 in 2000, now trading at a paltry $13, have become a shadow of what they once were and were worth . . . So they took the deal.

Then, while Facebook was on the road presenting to institutional investors, Morgan Stanley’s consumer internet analyst actually cut revenue forecasts for the company (Basis: FB’s latest SEC filings).

I cannot recall that ever occurring during an IPO roadshow.

With the stock over-priced due to the secondary markets and relentless media hype, and the lead underwriter telling the company what they wanted to hear, the next decision was to hand over the stock to an exchange. The choice was between two utterly corrupt institutions — the NYSE or the Nasdaq. Given that both entities had sold their souls long ago to the HFT traders, with their co-located servers and algorithms, it looked like the choice didn’t matter all that much, since each appear to screw over investors equally, allowing front-running by HFTs and other should-be-illegalities to occur.

With the benefit of hindsight, we can see that the Nasdaq was the wrong choice. Without a specialist to deal with the onslaught of 1000s of spoof quotes per millisecond via HFT algorithms, their systems was overrun by the bots. Here is the FT’s take:

“The question now will be: was Nasdaq the victim of catering to its best customers, the high-frequency dealers who provide the liquidity that attracts investors to the market, who wanted to keep cancelling quotes at millisecond increments during IPOs?The rationale for the design of Nasdaq’s IPO cross system was that IPOs, unlike normal opening and closing auctions, have no pre- or after-market trading. Therefore, IPO prices could fail to reflect where the market really stands, and add risk to market-makers.

The irony here is that Nasdaq has also been among the exchanges leading the charge to try to damp down excessive cancellations, in cases when there are more than 100 quotes per actual trade executed. In the case of cancellations, it is traders’ software – their algorithms that make trading decisions – that is in question; whether poor design makes them wasteful with their trading messages.”

What was that about HFTs being there to add liquidity? (Please tell me that the FT was being snarky).

Nanex explains this further:

Only High Frequency Traders (HFTs) can cancel quotes at that rate. And ironic enough, it was mostly HFTs that benefited later when Nasdaq quotes stopped coming from the Securities Information Processor (SIP) which transmits quotes for everyone who doesn’t get the premium direct feeds. The nearly 2 hour outage, from 11:54 to 13:50 (See Charts at link). Those who are co-located and get the direct feeds, namely HFTs, didn’t experience this problem, as trades continued to come from Nasdaq.

So even the choice of exchange worked to screw this up yet further. While the NYSE still engages in the same sort of HFT shenanigans Nasdaq does, the specialist could have controlled the high frequency firehose, electing to turn it off (or just ignore it) in order to make an orderly IPO market.

~~~

Thus, what we see are a series of bad decisions made by Facebook’s executives going back many years. The insiders got greedy, too clever by half, in how they used secondary markets. They picked a bad banker and an awful exchange. The stock broke syndicate on Monday morning, and I would not be surprised to see it eventually cut in half from the way-too-high offering price.

Compare the Facebook IPO with that of Google — there is a world of difference between the business models, earnings at IPO, valuations and multiples. Een the Dutch Auction process Google championed had worked out well for all involved — especially retail investors.

What a piece of work is man, indeed . . .

 

Previously:
Less than meets the eye at Facebook (Washington Post, February 11 2012)

Facebook’s IPO: What does it mean for you? (Washington Post, May 16 2012)

Sources:
Facebook IPO: How HFT caused the opening delay, and later benefited at the retail customer’s expense
Nanex, 18-May-2012
http://www.nanex.net/aqck/3099.html

‘Raindrops’ raise questions after Facebook IPO
Telis Demos in New York
FT.com, May 21 2012
http://www.ft.com/intl/cms/s/0/c1e84ac6-a2c8-11e1-826a-00144feabdc0.html

Morgan Stanley cut Facebook estimates just before IPO
Alistair Barr
Reuters  12:19 a.m. CDT, May 22, 2012   
http://www.chicagotribune.com/business/sns-rt-us-facebook-forecastsbre84l069-20120521,0,5871771.story

Category: IPOs, Markets, Quantitative, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

53 Responses to “How Facebook Fucked Up Its Own IPO”

  1. TLH says:

    More evidence that the elite feel it is OK to steal from the public. This just drives the public from the market.

  2. phb says:

    Zuck is genius, evil genius, but still a genius…and was not foiled

  3. philipat says:

    And of course, the Muppets as usual got screwed. With this, as with all IPO’s, for the retail investor, if you can get it, you don’t want it.

  4. ConscienceofaConservative says:

    Those 1000 investors who got in only recently should have told you everything. There was no need to raise money, so the conclusion is that these investors were the recipient of sweet heart deals.

  5. Moss says:

    Just business as usual for the syndicate. Over hyped, deceptive pricing, bogus execution, high fees. Oh well, the prospectus will CYA.

  6. rfinberg says:

    From Facebook’s perspective I would think they came out pretty good. They got the mega premium for their shares. Insider sellers are happy. Company banked a ton of cash.

    The alternative would have been getting priced at 22, and opening at 35-40. In that scenario, Facebook leaves money on the table and its the Investment bank insiders that benefit. Frankly, I kinda like seeing it where the issuing company comes ahead.

  7. super_trooper says:

    Don’t be a hater!
    The man-child is now a billionair, the ultimate indication of success.

  8. whskyjack says:

    From all the squawking I’m hearing I have a feeling that some are just realising they have been treated like a lowly muppet, not something they are used to. Welcome to the club boys.

    Jack

  9. Robert M says:

    Two thoughts, Serious first how the hell was it permitted to say that facebook was an IPO given there was, in essence, a private market exchange for the shares?
    Comic Karma it’s what for breakfast!

  10. dead hobo says:

    To me, this just looks like a little accidental kerfuffle. They probably meant well. Sometimes boo boos just happen. After all, these are important people who have reputations to protect. If you can’t trust a handshake, than what’s left? OTOH, perhaps this is just a beneficial dip to buy?

    Based on the rising markets, I suspect Europe’s problems are settled and the banking system there is highly secure. That Greece can sure be a rascal. Oh My!

  11. BennyProfane says:

    Hey, call me petty, but, you would think that he could at least buy a decent suit and tie his friggin’ tie before he gets his wedding pictures taken. This walking around like a fifteen year old is getting, well, old.

  12. PeterR says:

    The “Fa(r)ceBook” moniker appears to be sticking.

  13. A says:

    What do the quotes from Shakespeare and the IPO from Facebook have in common ?

    We persist in learning nothing from history.

  14. rktbrkr says:

    Will we be treated to a Farcebook flash crash?

    Is it publicly known how many FB shares MS is holding now?

  15. MojaveMax says:

    Here’s a photo of the typical Facebook investor, post IPO

    http://www.flickr.com/photos/expd/7247620098/

  16. [...] How Facebook fucked up its own IPO.  (TBP) [...]

  17. theexpertisin says:

    All that money for a social networking service that let’s you know what organic crap went down the pie-hole of a distant relative.

  18. cynical says:

    Hey BR – Longing for the good-ole-days when the street underpriced an IPO to leave some meat on the bones for institutional investors to flip it 10% higher 10 mins later? The bankers really worked hard for their money for those deals right? That cannot be what you want is it?

    The banker works for FB and getting the highest price for FB is her job. Apparently she did not lie when she put a 100bn valuation out there because she delivered it. Disagree all you want – I am sure that FB is very happy that you were not their banker getting them a 25bn valuation. The underwriter we can argue has to balance the “market” and investors but that is hogwash. The banks were paid by FB to get the highest price and they did. Period. Investors need to do some f-ing independent diligence (like the MS analyst obviously did) and decide to play or not.

    Unless you are alleging some sort of illegal activity the bankers did their job. They found the highest bidder in the market and pummeled them with shares. The pump-n-dump IPOs for abcxyz.com etc were a sham. Bankers working for FB – which is corp america and not a bankster – is what everyone wants banks to do. They want banks to work for their customers not just for the street.

    Re HFT – I dont have a specific comments. But I would say make the rules simple. And get rid of premarkets. They dont help mom-pop they are there for institutions. Just open it at the same time for everyone. And retail will very very quickly learn that a market order into an IPO is nothing more than asking to be ripped off.

  19. VennData says:

    Google eschewed the Wall Street toll booth and the talking heads dig at them every chance they get, but Google was right.

  20. Julia Chestnut says:

    I have an interesting, shark-jumped feeling about the whole thing. We all know that the equity markets have ceased to serve the utility function they once did, and have become instead a drain on the productive economy – in effect, a tax on productive businesses rather than a way for them to get capital in an organized fashion while investors can still have liquidity if needed. Algorithms relentlessly chewing and clawing every 1/10th penny out of any possible arbitrage for use on someone’s larger 4th vacation home while Rome burns.

    We also have watched as ordinary retail investors slowly disengaged over the past few years – perhaps it was one crash too many in recent memory, perhaps it is the boomers reducing their risk profile as they reach retirement age, perhaps it shows a lack of savings and wealth on the part of an increasingly desperate population: no one can say for sure. But I feel in my gut (yeah, real scientific) that it is a feeling on the part of many that the market is fixed, and that they are the mark.

    When the market sets it up like they are used to doing, hypes it within an inch of its life, and expects the public to snap it up like Wills & Kate collectible teapots — and they don’t? I wonder if they get the market signal that implies. Perhaps I’m reading too much into it. But I wonder how long before it becomes shockingly obvious that the market is naked and parading through the streets.

  21. rd says:

    HFT provides huge liquidity when you don’t need it. It disappears when you do need it.

    Most of the mom and pop muppets were probably paying no attention to this at all since they are slowly leaving equities behind. However, many financial pros are starting to realize that they are becoming the new muppets. The bigger sharks are starting to feast on the smaller sharks as the prey fish disappear.

    You keep using words such as “unlawful” in your posting. I thought that word and its many synonyms, along with “regulation” had vanished from the Wall Street lexicon. Financial sector – welcome to the wonderful world of the private sector with a free hand as the laws and regulations are being eliminated or unenforced. With the strong lobbying push for additional deregulation, there are lots more of these wonderful events to come. It is up to all of the sophisticated investors and traders to police yourselves now. I am sure that they are dreaming up all sorts of cool ways to punish NASDAQ and Morgan Stanley so that they won’t repeat this debacle. The best part is that all of the paperwork still needs to get filled out and filed so that the system can still pretend that it is safe.

  22. jpmist says:

    Ah, welcome back, Barry Ritholtz, you’ve been missed. . .

  23. AHodge says:

    so can we short it now?
    all good comment here
    the only thing that counts is how quickly people forget price downaction
    and how many billions Markie and his minions can spend getting the price to rise into end of lockup?
    when is that?
    i heard a lot in November
    one more essential piece nobody wants to know apparently

  24. [...] things hold up. Put a fork in it…it’s done! Read all about it below. I especially liked How Facebook Fucked Up Its Own IPO. Enjoy…unless of course you bought into [...]

  25. Through the Looking Glass says:

    Why this video has only 36 million fans stumps me. It makes more sense than Facebook . many kids have quoted its philosophy and it’s one school’s motto.

    Maybe it should be Wall Street’s new motto. http://www.youtube.com/watch?v=CMNry4PE93Y

  26. greybridge says:

    This performance could bring “jumping the shark” moment for Facebook … My views @ – http://gluelike.blogspot.com/2012/02/what-would-be-facebooks-jump-shark.html

  27. b_thunder says:

    GOOG is basically an R&D lab run by scientists and funded by ads

    FB is a boiler room run by a hackers (in the worst possible sense of the word) and is funded by hype, hope, virtual cash and eyeballs.

  28. jcrane1028 says:

    I disagree with cynical that the underwriters did a good job for FB. Yes, 20% or so of the market cap “sold” for $38 (how much repurchased by MS at that price?) but the other 80% will arguably be worth considerably less than if the IPO were properly priced and the aftermarket was strong. Furthermore, it is unlikely that the 63 million share shoe will be exercised, costing the selling shareholders additional immiediate proceeds of over $2 billion. It is a mistake, often perpetuated by CNBC and others, that the underwriters directly profit by exercising the shoe if shares appreciate in the aftermarket. That exercise only covers shares that were sold short at the offering price at the time of the IPO. For whatever reason, HFT, misreading demand, or giving in to management pressure, MS mispriced the offering.

  29. bonghiteric says:

    I’ve been following FB for some time on SecondMarket. Since so doing the lowest bid (dutch auction) on Class B shares was $31 in late 2011. You would’ve had to buy shares auctioned in mid 2010 to make any decent return (contracts priced at $15-$20). Which presents another problem as there was still significant upside to the broad market rally from then to now. So a rational investor would be engaging in pure speculation because the lack of significant research or financial info from the secondary markets is nil. The last contracts (shares sold by insiders) for FB were priced in the low-mid $40′s. So there are plenty of underwater buyers the last several days.

    So what do you get if you’re an accredited investor and choose to purchase shares via SecondMarket or other private markets? Well, since I haven’t purchased any shares of a company yet, I’ll give them the benefit of the doubt and hope that once you work with a specialist and seriously indicate your intentions of purchasing shares, current financial information will be released. However, I’m dubious of this. For a “browser” like myself the information/research provided is scant. Not nearly detailed (or often current) enough to make an investment decision. The recently passed crowd funding legislation is going to create a slew of lawsuits as some of these companies are going to flameout.

  30. James Cameron says:

    “The institutional buyers don’t want to be left holding the stock as it slides, and individuals aren’t knowledgeable enough about the company to step in and catch a falling knife,” Wedbush analyst Michael Pachter said in emailed comments.”

    Facebook called ‘falling knife,’ shares drop again

    From: http://goo.gl/KOic4

    Actually, I think it likely that retail investors were very wary of getting in on this stock, having been burned so many times before and seeing all the hype.

  31. gasman says:

    i don’t understand why everyone is so fired up about this IPO.

    MS just sold 20% of the company for almost as much as the whole thing is probably worth. so FB and MS did exactly what they are trying to do with an IPO.

    i didn’t read one thing about the FB IPO being “cheap.” who really wanted to hold FB stock long term priced at $38? no one. regardless if there were technical glitches or not, there just wasn’t demand for this stock above the IPO price.

    the world’s smallest violin plays for all those who were holding this stock just to sell the initial “pop.” they were being speculators, not investors. sh** can happen when you speculate. everyone in the market knows that.

  32. Singmaster says:

    Facebook, a wildly overvalued momentary internet phenomena led by an arrogant 28 year old man-child, decided to treat the process of going public with the same respect they do their users’ privacy, which is to say, with none at all.

    Beautifully written. Thank you.

  33. AHodge says:

    actually i suppose the prior unloading in Second market and others
    may limit the damage done by end of lockup and all the friends family, VC boys, oh employees.
    of course there are hardly any vendors and suppliers this time as with most other teck ipos
    BECAUSE its literally nothing but an f ing app rather than a business

  34. AHodge says:

    make that customers and suppliers

  35. AHodge says:

    they do have some suppliers
    PR and image management im guessing a buttload and worth spreading some stock
    and some ad agencies

  36. obsvr-1 says:

    best one liner I heard yesterday

    “Facebook did a FACE PLANT”

  37. [...] A Facebook underwriter cut estimates during the company’s road show.  (Business Insider, Big Picture, Felix [...]

  38. Abby Cakes says:

    Thats what you get for being selfish. How can a company that is going to expect just under a billion in profits in a rolling 12 months be worth 100 billion? I believe that Facebook has value but its going to take them a while to milk it fully.

  39. ToNYC says:

    I’m like’n FaceTook now that I mention it.

  40. fp says:

    So FB fucked up its IPO by selling too many shares at too high of a price? I wish I could fuck up like that.

  41. patfla says:

    I enjoyed how macro man (http://macro-man.blogspot.com/) described the FB IPO:

    Thursday, May 17, 2012

    You know it’s May when-

    1) Greece is doing its best to detract holiday makers and you wonder if you should forgo the deposit on your Greek Holiday.
    2) David Cameron is crowing about how to run Europe.

    ………

    15) Despite the end of the world, someone manages to IPO a grillion $s worth of non-controlling shares in a company that everyone uses for free.

  42. cynical says:

    @jcrane1028

    That is assuming that the holders of the remaining shares want to sell their shares in the very near future. Otherwise the stock will go where it goes based on value. And my assumption though not stated was that the customer – Facebook, MZ, etc – was directing MS to get the highest IPO value and not the highest secondary pop.

  43. Peter Principle says:

    Facebook’s slogan: Be evil.

  44. JasRas says:

    …”Then, while Facebook was on the road presenting to institutional investors, Morgan Stanley’s consumer internet analyst actually cut revenue forecasts for the company (Basis: FB’s latest SEC filings).

    I cannot recall that ever occurring during an IPO roadshow.”…

    Been a looong time since I took the Series 7, but I seem to remember that this kind of activity would be *illegal* during the time that the red herring was out… That is supposed to be the ONLY piece of information on the offering.

    The fact that anyone was offering any opinion or projection outside of the red herring should have been a red flag for the SEC to step in and force the process to start over.

    Apart from that, I would present this is exactly what happens when the underlying company extracts every ounce of “value” from the offering and leaves nothing for the Street and Public… While the talking heads love to berate investment bankers for “leaving value on the table” when pricing an IPO if it goes up at all from the offering price, the simple fact is just like aging a bourbon, you have to leave some of the product “for the angels”… So now everyone is crying “foul” because FB was a selfish company. Is anyone surprised? I think Zuck’s lack of understanding of social mores is pretty well documented.

    If you couldn’t tell this puppy was toxic, you’ve been away from the IPO market waaaay too long. Rule of thumb: If you can’t get it, it’s good, when they’re calling you and asking you if you want more, it’s bad.

  45. from above..

    clippings..

    “…Ah, welcome back, Barry Ritholtz, you’ve been missed. . .”

    ~~~

    “…Facebook, a wildly overvalued momentary internet phenomena led by an arrogant 28 year old man-child, decided to treat the process of going public with the same respect they do their users’ privacy, which is to say, with none at all.

    Beautifully written. Thank you…”

    x2

  46. RC says:

    BR rocks. Great summary of what has transpired so far.

    The choice was between two utterly corrupt institutions — the NYSE or the Nasdaq.

    Why dont we see this type of honesty in MSM? Jon Stewart’s brother was

    This IPO actually being a secondary for all practical purposes is such an important point but did not hear about that in the MSM.

  47. RC says:

    Hit submit too quick. Sorry about the mangled comment.
    I just wanted to congratulate BR for a beautifully written, poignant post.

  48. Deborah says:

    I wholeheartedly agree on the characterization of the leader of facebook.

  49. [...] Facebook User? Anyone who clicks “Like”). Secondly, the notorious but accurately titled post How Facebook Fucked Up Its Own IPO. [...]

  50. blinblin says:

    That was definitely an effort worthy of a piece de resistance.
    It was a dish fit for a king mostly because you nailed not only the situation but the man himself.
    Absolutely brilliant.

  51. [...] Facebook ‘app‘ is of German origin: the Zuckerberg Thumbscrew… an old device of restrain and pain put to new use after the recent FB IPO [...]