The Facebook IPO: Borderline Criminal?
Richard is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Okay, let me give you a bit brief rundown of what took place during the Facebook (NASDAQ: FB) IPO and not only why it matters to common investors, but also why it might affect Facebook’s business.
Here’s what took place. During the company’s road show, a Facebook exec verbally told underwriters and institutional investors that Facebook’s second-quarter and full-year earnings would be weaker than expected. Basically, Facebook pre-announced their second quarter earnings, only instead of his being widely dispersed common knowledge, it was a whisper into the ears of the big Wall Street players.
The reason for the internal downgrade was because more and more Facebook users are logging into the site by a mobile phone, which Facebook has struggled to monetize.
Naturally, this diminished the appetite of the sophisticated smart money for Facebook shares. Meanwhile, Facebook not only raised the number of shares being offered, but also the offering price to $38.00, as institutional investors cut back their buy price to $32.00 based on the new information, which probably not coincidentally is where shares found buying support on the way down.
This selective disclosure is at minimum grossly unfair to investors who bought in when the stock debuted on Friday, and had no idea of the added information. The simple fact is, many mom and pop investors would have shied away from the offering with the added knowledge. They got screwed, there’s absolutely no other way to put it.
So while mom and pop were snatching up as many shares as they could, the "smart money" was selling into the buying frenzy, which is why there was not the expected pop in price - it was already at overpriced levels.
In my opinion this is an absolute crime. This is the definition of insider trading - trading on knowledge not readily available to the public. In my opinion, those at Facebook who decided to selectively leak this information should go to jail. Essentially they stole money from mom and pop, added used their cash to line the pockets of the founders, the underwriters, and the Facebook treasury.
This is a major slip-up. As news of this disseminates, a growing number of dissatisfied investors, knowing that they got screwed, will develop a negative association to using the site, thus likely costing Facebook customers not only of those who bought in, but also those with their circle of influence. On the Internet, reputation is everything, and when users begin to lose trust in the company, there could be a massive and swift migration to a competitor's offering, like Google's (NASDAQ: GOOG) Plus.
The IPO went off in $38.00 a share because Facebook and Morgan Stanley knew the demand from individual investors was so high that they did not need the institutional money to be able to sell off all their inventory. While the less-knowledgeable bought in, the smart money was cashing out, because of the utterly unfair and likely criminal distribution of information! Heads should roll.
Mark Zuckerberg and Facebook should be on their best behavior. While the company is likely to weather this storm, any type of repeat offense could have a dramatically negative affect upon its business. Next to its ubiquity of use, the greatest asset that Facebook has is its reputation, and that just got severely tarnished.
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