September 06, 2012
Absentee Grownups at the Facebook IPO
Posted by Usha Rodrigues

Who's ultimately to blame for the fact that the Facebook IPO was colossally overpriced?  So much so that it's lost $50 billion of market cap in 3 months?  Andrew Ross Sorkin made a compelling case earlier this week for Facebook's CFO, leading with a killer two-sentence paragraph:

It is David Ebersman’s fault. There is just no way around it.

Sorkin's DealBook piece is well worth a read, but left me ultimately unconvinced.  Here's why.  In general, our securities laws view firms wanting to sell stock to the public with suspicion.  What's to keep fly by night companies from lying about their assets, inflating their worth, and then getting while the gettin's good? 1929 and all that. 

The bankers, that's who.  The rather elegant mechanism of the Securities Act of 1933 is to put a deep-pocketed repeat player, with reputational capital as well as cold hard cash at stake, on the hook.  Cue the investment banks.  Sorkin may be exactly right to blame Ebersman because

[h]e signed off on the ever-increasing offer price, which ended up at $38 after the company had originally planned a price range of $28 to $35.He — almost alone — pushed to flood the market with 25 percent more shares than originally planned in the final days before the offering.

But there's at least an argument that he was acting in the company's best interests by pushing for a high stock price, not leaving money on the table, etc.  The fact that the 25% of extra shares came not from the company but from Facebook's investors weakens this argument, but a high price range still benefited the company.  Morgan Stanley was supposed to be the grown-up here, stepping in and saying, "Not so fast, the market might not bear this price, let's look at demand, let's look at the fact that Facebook shares have been trading on the secondary market for a while." 

But Morgan Stanley appeared so delirious over having hooked the IPO of the decade that it forgot its role in the IPO: it was supposed to be the grownup. 


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