Ask HN: Are we drawing the right conclusions from the Facebook IPO?
• This is not 1999. Stop worrying that it is. • We created the hype around Facebook. Facebook as a company really had nothing to do with what just happened. They were just along for the ride, like the rest of us. • If you don’t think Facebook is worth $100 billion, <b>then don’t buy Facebook shares</b>. No one is forcing you to. • The IPO process is incredibly broken and incredibly inefficient, still favors Wall Street insiders to the disadvantage of retail investors, and is simply not transparent. But given the interconnectedness of today’s world, all of this will change soon. The IPO process as we know it will be fundamentally reborn in the new future, and it will become much more fair. Otherwise, no one will want a part of it.
Don’t believe me? Let’s take a look at some of the postmortem analysis from the past few days: (NOTE: Some of these articles make good points. I’m only pointing out the things I disagreed with)
Gawker – The Facebook IPO Was an Inside Job http://gawker.com/5912419/the-facebook-ipo-was-an-inside-joke (accessed on 5/23/12)
“Facebook's stock continues to suck harder than a Northwestern University freshman on a 5-foot bong in his profile pic.” Your snarky opener is really contributing to the conversation.
“It turns out that the insiders who did the Facebook deal withheld some important information that showed it wasn't such a good deal after all. Analysts at three of the major underwriters, including Morgan Stanley and Goldman Sachs, significantly reduced their forecasts for Facebook's revenues just before the IPO, according to Reuters. They did not widely publicize this information via, say, a Facebook status update. They quietly shared it with their buddies at hedge funds and other big investment firms, many of whom cut back on their investments accordingly. Meanwhile, the general public continued to froth at ever-climbing valuations.” Yes, this is something that the bank analysts and Wall Street syndicate partners appear to have done. And it angers people, rightly so.
“"Facebook was whispering in the ears of the lead managers of its investment banks, on the understanding that the results of those whispers would remain available only to select clients until after the IPO was over," writes Reuters' Felix Salmon. This doesn't seem to be illegal, just shady as hell.” Is Felix really saying this is true? That Facebook actively and intentionally whispered material, non-public information into the ears of the Wall Street analysts? If so, that’s pretty damning. But I’ve read Felix for a while and I don’t think he would make a claim like this without having the facts. We’ll go to the source in a minute.
“So, Mark Zuckerberg screwed Facebook investors in the IPO like he's screwed Facebook users on privacy. (Hours before the IPO, Facebook was hit with a $15 billion lawsuit over privacy violations.) This would be just a hilarious coincidence, except for the vast amounts of money he's made doing both.” I see that this is the conclusion you’ve drawn. I disagree. I think you’re making assumptions that aren’t correct and need to reexamine your thinking. But I’m sure you got some pageviews because of your conclusions. That’s your job, after all: to get pageviews. Not to be right.
Felix Salmon, Reuters – The Facebook earnings-forecast scandal http://blogs.reuters.com/felix-salmon/2012/05/22/the-facebook-earnings-forecast-scandal/ (accessed on 5/23/12)
“As Henry Blodget says, this whole episode stinks. It’s almost certainly not illegal. But if you look at the Finra rules about such things, it definitely violates the spirit of the law. For instance, the rules say that Morgan Stanley analysts weren’t allowed to show Facebook their research before it was published — but they don’t say that Facebook can’t quietly whisper in Morgan Stanley’s ear that its estimates might be a bit aggressive.” I think most people would agree that this whole episode stinks. But let’s make sure we come up with the right conclusions about why this stinks.
“What [retail investors] didn’t know — what they couldn’t know, because nobody told them — was that those estimates had been cut, significantly, just days before the IPO.” No argument here.
“It’s true that retail investors weren’t buying Facebook stock on the strength of the banks earnings estimates, since they didn’t (and still don’t) know what those earnings estimates are. But here’s a material nonpublic fact about Facebook, which retail investors and everybody else in the deal deserved to know: all three underwriters cut their estimates simultaneously, in response to some very minor changes in the revised IPO prospectus.” Again, no argument here.
“Here’s Blodget: Speaking as a former analyst, it seems highly unlikely to me that the vague language in the final IPO amendment would prompt all three underwriter analysts to immediately cut estimates without some sort of nod and wink from someone who knew how Facebook’s second quarter was progressing.” Aha! So Blodget thinks that Facebook had to have leaked information, or at least given ‘some sort of nod or wink’, because… Because that’s what he thinks. If there were some evidence to support this, please bring it to the public. Bring it to the SEC so they can investigate. But you’re telling me Facebook should be implicated in all this because Blodget thinks so? Give me a break. Blodget is a true pillar of integrity and ethical behavior</sarcasm>.
“This does not mean, of course, that Facebook stock is doomed for all eternity: it could pull an Amazon, and rise sharply out of its post-IPO slump. But this does mean that shareholders should not expect much in the way of transparency or full honesty from a company which is controlled by Mark Zuckerberg personally and which has deliberately created a dual-class share structure in order to to ensure that they can be completely ignored on all decisions. <b>Facebook was whispering in the ears of the lead managers of its investment banks, on the understanding that the results of those whispers would remain available only to select clients until after the IPO was over.</b> That’s not cool. And as a result the company definitely deserves the latest lurch downwards in its (still frothy) share price.” Jump to conclusions much, Felix? I expected much more from you.
Maybe I’m wrong. Maybe someone at Facebook did leak some information to the Wall Street analysts. Maybe everyone is right to be mad at Facebook.
But I have a different view. I think what this fiasco really shows is that the interconnectedness of today’s internet makes it impossible for Wall Street to operate in the shady, opaque manner that is has for decades. The free ride is over. No one will tolerate this horrible inefficiency that benefits Wall Street insiders to the detriment of everyone else anymore.
This should lead to the democratization of finance. A level playing field. Retail investors are becoming smarter, and Wall Street insiders can no longer pray on the ignorance their ignorance. Which makes me think that Wall Street banks are overvalued. Maybe I should short JP Morgan and Goldman instead of Facebook.
In fact, all of this negativity surrounding Facebook is making me think that now might just be the perfect time to buy Facebook shares. If Facebook can finally learn the lesson that its experienced users hate ads, maybe they can focus on creating value for their users instead. If Facebook does figure that out, watch out. A $100 billion valuation would be incredibly undervaluing the company.
Anyway, that’s my take. I may be wrong. But if I am, I’m certainly willing to admit it.
Emmett twitter.com/eragnew