Posts filed under “IPOs”
John Hempton at Bronte Capital often makes for an interesting read. Today, however, I have to disagree with his take on the ethical obligations of investment bankers in the Facebook IPO. (Facebook and the sad case of ethical investment bankers).
“In an IPO an investment bank takes a fee from a business to place that stock in financial markets. Or, more precisely, they take a fee from a business to sell part of that business. Their customer is the company doing an IPO and they have a legal and moral obligation to get the highest price for the company they are selling. No more. No less . . .
The investment bank owes a duty to the seller of the IPO and that is all.”
I believe that statement is quite an oversimplification.
Perhaps it is the corporate attorney in me, but good counsel offered to firms going public needs to be more nuanced than “maximize price – period.” After all, IPO pricing is as much art as science; merely generating the highest IPO proceeds at the expense of every other factor is likely to be short-sighted.
Said another way, it may not be in the best interest of the company to say the hell with everything else, lets top tick our price at the IPO. (I will ignore the selective disclosure issues in order to stay focused on the IPO pricing issue in this exercise).
If I were Facebook’s iBanker, my ethical obligations would have included having a sit down with the company’s senior management team prior to going public, and offering up the following counsel, emphasizing these 3 points in particular:
“Folks, you have built a tremendous internet company in a very short time. Your brand recognition and reach are enormous, and the public perceives you as a (mostly) positive force in their lives.
However, there are a few issues that need to be resolved — some hair on the deal. Rather than detail all of them, let’s discuss three.
1. Pre Public: Let’s begin with the issue of all the publicly traded shares pre-IPO. You have practically gone public already given the extensive number of non-employee, non-venture backing shareholders you have; note that these public sales occurred without the usual legal disclosures, accounting statements or risk statements. These markets are opaque in terms fees and costs, lack full transparency as top pricing. This is why what they do cannot safely be called “price discovery.”
Thus, you have a growing class of shareholders who are uninformed about youre company and its prospects.
2. Valuation: The second issue stems directly from all those private and seemingly uninformed buyers — and that is the valuation. By any conceivable measure, the prices at which shares were changing hands in the private market were extremely rich. With revenues at $4B, and profits at $1B, pre-IPO, you are trading at 28X sales and 100X earnings. Just as a comparison, firms like Microsoft, Apple and Google all went public at 4-5X sales and 25X earnings.
3. Long Term Relationship with Your Investors: The buyers of your stock are looking to grow with the company over the next 5, 10, or even 20 years. The dual class structure is a red flag to many of the potential investors, and your pricing is the other. If you do not want a relationship with the mutual funds, indexes, and individual investors who are the potential long term holders of your stock, then why are you going public?
Even after this liquidity event, you are still very substantial owners of stock in Facebook. Have the patience to grow into your valuation, rather than trying to ring the bell at your IPO . . .
That is the advice I would have given. Alas, we don’t know if such counsel was ever shared with the management team, but we do know that it (or anything like it) was not taken.
Here we are, several weeks post-IPO, and the stock is down 26%, trading for under $28.
Not only has the debacle dissuaded all sorts of investors from holding this issue, it may have even damaged Facebook’s brand. We probably won’t know the complete impact of the botched IPO’s total fallout until year’s end.
Meanwhile, Facebook’s stock continues to grope for a floor. My best estimate of fair value is when its in the teens — just like most of its users average age . . .
The ongoing decline in Facebook stock is little more than a reassessment of the private market’s valuation — now recognized as somewhere between wildly optimistic and clinically insane. Bloomberg calls Facebook the “the worst-performing large initial public offering during the past decade” losing more than 20% in the 10 days since the IPO….Read More
Click to enlarge:
As Facebook’s IPO opened, real-time data feed (and HFT critic) Nanex Research noticed a strange anomaly: A Crossed market. This occurs whenever the Bid price is higher than the Offer (the spread is inverted).
What might be the source of this? Take a wild guess:
This also brings another example of the dangers of placing a blind, mindless emphasis on speed above everything else. Algos reacting to prices created by other algos reacting to prices created by still other algos. Somewhere along the way, it has to start with a price based on economic reality. But the algos at the bottom of the intelligence chain can’t waste precious milliseconds for that. They are built to simply react faster than the other guys algos. Why? Because the other guy figured out how to go faster! We don’t need this in our markets. We need more intelligence. The economic and psychological costs stemming from Facebook not getting the traditional opening day pop are impossible to measure. That it may have been caused by algos reacting to a stuck quote from one exchange is not, sadly, surprising anymore.
Ironically, the NASDAQ’s clients are no longer the investing public, but rather are HFTs. Whiole most people look at this as a black idea, I suspect the Nazz’ accountants think its much ad o about nothing . . .
More charts after the jump
Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission, talks about delays in Facebook Inc.’s first day of trading and the impact of high-frequency transactions on stock exchanges. Nasdaq OMX Group Inc., under scrutiny after shares of Facebook were hit by delays and mishandled orders on its first day, blamed “poor design” in the software it uses for driving auctions in initial public offerings. Chilton speaks with Cory Johnson on Bloomberg Television’s “Bloomberg West.”
Source: Bloomberg May 21 2012
Amid allegations of selective disclosure of information and technical problems on the NASDAQ, Facebook’s initial public offering has led to a flurry of litigation. According to Roben Farzad and Josh Brown, however, the missteps are unlikely to lead to any meaningful regulatory reform. Roben is a senior writer at Bloomberg Businessweek and Josh is a financial advisor at Fusion Analytics. They talk with Bloomberg Law’s Lee Pacchia.
Bloomberg Law, May 24 2012
(Are we sick of discussing this yet?)
Market strategist Barry Ritholtz explains his views on the Facebook IPO debacle and why the social-networking company has no one to blame but itself for the mess due its greed, which he describes as not that far below that of Bernie Madoff.
5/24/2012 4:52:31 PM
Did Facebook Feed Inside Information to the Big Boys … While Leaving the Individual Investor In the Dark?
Reader McFid – who has been a breach of fiduciary duty expert since 2003 – sent me the following article:
Today, The Daily Beast reports that certain underwriters may have lowered their revenue projections prior to the IPO AND may have informed some investors; but not all investors. I was jammed up last week and could not get the fact out of my mind that while on the road show that there would be private one-on-ones for certain investors. The general road shows surface questions, many questions over and over; there is no doubt that these questions (I wasn’t there) were laser focused on revenues; whether new models compared to pre-IPO or ARPU (average revenue per user). The private one-on-ones cast extreme scrutiny on revenue numbers and assumptions – past present and future. NO DOUBT: When underwriters, no doubt listening, perhaps bristling and responding to potential investor’s questions, probes and scrutiny – likely, as is often the case when more than two people look at the same set of numbers, raised some hard-to-dispose-of aka troubling issues causing them (apparently) to adjust projections DOWN; but they decided not to disseminate that to ALL investors. What are the future prospects? Some may ask with approximately 800 million users how many more would sign up in the future? And given the anti-climactic IPO fallout how many will remain active, revenue paying users? Facebook’s tagline ironically is, I believe, to promote a more open, transparent and connected world. Really? There can’t be a more prominent example … of information assymetry; unequal, untimely and incomplete information – perhaps knowing, willful and intentional and approaching recission of all those IPO allocations – si?
Morgan Stanley selectively disclosed the change in Facebook estimates.
Business Insider confirms that this might be a big story:
The analysts cut their estimates because a Facebook executive told them to, a source tells us.
The information about the estimate cut was then verbally conveyed to sophisticated institutional investors who were considering buying Facebook stock, but not to smaller investors.
The estimate cut appears to have influenced the investment decisions of at least some institutional investors, dampening their appetite for Facebook stock, and crucially affecting the price at which they were willing to buy Facebook stock.
As I described earlier, at best, this “selective disclosure” is grossly unfair to individual investors who bought Facebook stock on the IPO (or at any time since).
At worst, it’s a violation of securities laws.
This latest chapter in the Facebook IPO story began this morning, when Reuters’ Alistair Barr reported that the research analysts at the company’s lead underwriters—Morgan Stanley, Goldman Sachs, and JP Morgan—had cut their earnings estimates for Facebook during the company’s IPO roadshow. This was highly unusual, if not unprecedented (I’ve been in and around the tech IPO business for almost 20 years, and I’ve never heard of it happening.)
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…Read More
Given the insane hype surrounding the Facebook IPO, it should really have come as no surprise to anyone that it’s being perceived as a massive flop. (A search at the NY Times website turns up no articles about Cisco Systems 1990 Initial Public Offering (Feb 16, 1990 at a split-adjusted price of $0.06); it does…Read More