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Facebook’s Awesome IPO

The total value of Facebook stock is down more than $50 billion in the 90 days since its initial public offering, which Andrew Ross Sorkin dubs a “debacle” that’s chief financial officer “David Ebersam’s Fault.”

Let me say that again for emphasis: Facebook’s market value has dropped more than $50 billion in 90 days.

To put that in perspective, that’s more market value than Lehman Brothers gave up in the entire year before it filed for bankruptcy.

[…]

He signed off on the ever-increasing offer price, which ended up at $38 after the company had originally planned a price range of $29 to $34.

He — almost alone — pushed to flood the market with 25 percent more shares than originally planned in the final days before the offering. And since then, as the point person for investors, he has done little to articulate how or why the company’s strategy will lift the stock price any time soon.

At a time when investors are looking for some semblance of accountability on Wall Street and in corporate America, it is remarkable that nobody — no bankers, no one at Nasdaq, no one at Facebook — has been fired for botching the offering.

The problem with this, argues Mark Cuban, is that Sorkin doesn’t seem to understand either the purpose of an IPO or the job of a CFO.

Have you ever been to an auction where the selling party told a buyer to reduce their price because they were worried that the item might not hold its value ? Neither have I. If the CFO of Facebook came on SharkTank and told me that he was able to sell his shares to the public for $38 a share, but turned down the opportunity, I would crush him for being an idiot.

Facebook was able to raise about 10 BILLION DOLLARS in this IPO. The CFO’s job is not to manage shareholder portfolios. His job is to help Facebook succeed. I don’t know about you, but putting 10 BILLION DOLLARS in the bank in my opinion is one way to help them succeed.

Who’s job is it to help manage the portfolio’s of FB investors ? If an investor doesn’t manage their own portfolio, the brokers who sold them the stock are responsible. It’s their job to read the prospectus if you as an investor are too lazy to do so. It is the job of the broker to help the investor understand the value of the company and make a buying decision. No question that there are a lot of brokers out there that did not do their jobs.

As far as traders who bought the stock hoping for a pop. No one cares about them. Seriously. You trade, you know you are going to lose on trades. That is how things work.

I bought and sold FB shares as a TRADE, not an investment. I lost money. When the stock didn’t bounce as I thought/hoped it would, I realized I was wrong and got out. It wasn’t the fault of the FB CFO that I lost money. It was my fault. I know that no one sells me shares of stock because they expect the price of the stock to go up. So someone saw me coming and they sold me the stock. That is the way the stock market works. When you sit at the trading terminal you look for the sucker. When you don’t see one, it’s you. In this case it was me.

If the goal of the company is to maximize the cash obtained from the IPO, then the CFO should absolutely price the stock to maximize the return. If the goal of the company is to get a 1 day pop to make a PR splash , that is a completely different strategy. It obviously was not the strategy of Facebook. Facebook maximized the cash available to it. They have been very clear that they will not manage the stock, they will manage the company to reach the goals they have been very open and honest about. Good for them.

But Sorkin argues that the falling stock prices are hurting the company, not just investors:

Facebook’s falling stock price is not just a problem for investors; it is quickly creating real questions inside the company about its ability to retain and attract talented engineers, the lifeblood of any technology company.

Employees who joined the company starting in 2010, for example, are now holding onto restricted shares that were granted at a higher price — $24.10 — than the current trading price. (It should be noted that these are restricted stock units, not underwater stock options, so they do still have real value, but not nearly what the employees had expected.)

Employees with some two billion shares will have the opportunity to begin selling them this fall, which is one reason Facebook shares have been depressed lately.

To which Cuban retorts: “Apparently Andrew forgot that companies can re-price their options. Problem solved.”

Beyond that, one would think a lower stock value would make employees holding the stock less likely to leave Facebook, not more. After all, if you can cash out and get millions of dollars, there’s much less incentive to show up for work every day.

Regardless, Cuban is right: The point of an IPO is to raise a boatload of cash. Facebook achieved that goal. Now, the question becomes: What do they do with it? If they invest it an make the company more profitable, the value of the stock will again rise. If not, it won’t.

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About James Joyner
James Joyner is the publisher of Outside the Beltway, an associate professor of security studies at the Marine Corps Command and Staff College, and a nonresident senior fellow at the Atlantic Council. He's a former Army officer and Desert Storm vet. He earned a PhD in political science from The University of Alabama. Views expressed here are his own. Follow James on Twitter.

Comments

  1. lankyloo says:

    I completely agree with Mark Cuban here.

    I can’t believe I just wrote that sentence. I need a drink. And a shower.

    Like or Dislike: Thumb up 2 Thumb down 0

  2. legion says:

    Cuban does have an excellent point, and it goes to a basic misunderstanding a lot of people have about business in general. Facebook doesn’t exist to build a social media product. It exists to make money for its investors. If they can do that by having an IPO, they’ll have an IPO. If they can do it by buying Mozilla and competing with Google & MS on the browser front, they’ll do that. If they think they could do better by just throwing in with Zynga and becoming a game company, that’s what they’ll do.

    There is no such thing as a “moral company”. there may be moral people running it at a given point in time, but as far as companies go, there are ones that make money and ones that don’t exist anymore. If, as Sorkin posits, the drop in price is actually hurting FB’s ability to function, then they’ll be on the hook to do something about it. But Cuban’s right – bringing in $10b liquid is nothing to sneeze at…

    Like or Dislike: Thumb up 6 Thumb down 0

  3. Me Me Me says:

    It isn’t the CFO’s fault. It is the fault of the idiots that bought into a grossly over-valued asset, despite the fact that they are supposed to be super-bright highly-trained highly-skilled professionals who simply have to be paid millions of dollars a year to keep them from destroying the country by going Galt.

    Like or Dislike: Thumb up 3 Thumb down 0

  4. lankyloo says:

    @legion:

    But the people who became shareholders when they bought Facebook stock lost money. A lot of money. What Cuban is saying is that Facebook had no responsibility to make sure that they were fairly evaluating the price of their stock. Facebook generated a lot of capital, which is what an IPO does, but at the same time, actually lost value for the new shareholders. The generation of capital and making money for shareholders are not the same thing here.

    Like or Dislike: Thumb up 1 Thumb down 0

  5. OzarkHillbilly says:

    When you sit at the trading terminal you look for the sucker.

    Tell me again why people “invest” their money with the Wall Street grifters?

    Like or Dislike: Thumb up 3 Thumb down 0

  6. legion says:

    @lankyloo: True, but from what I’ve read (and I admit, I haven’t really plumbed the depths of this particular thing), it sounded like the real problem with this IPO was that the underwriters (Morgan-Stanley and JPMorgan Chase, among others) failed to do a good job managing the change in valuation and communicating a realistic price to their own investors. While it does appear the CFO didn’t make their job any easier, it’s not his responsibility to manage – it’s the underwriters’ job. In the end, only “some” investors got the word that the stock was waaaay overvalued, and a whole lot of people got taken for a ride, but it still sounded like more of a failure of the underwriters than FB itself.

    Like or Dislike: Thumb up 1 Thumb down 0

  7. legion says:

    @OzarkHillbilly: The same reason people go to Vegas – they think they can beat The House. When really, the only one who ever makes money _is_ The House. The real Con is when they set up people to look like players that win big, when they’re really just another employee of The House… _That’s_ what keep the rubes coming back.

    Like or Dislike: Thumb up 2 Thumb down 0

  8. grumpy realist says:

    What I couldn’t understand was why people would buy Facebook at the IPO. I thought it incredibly overpriced, particularly in light of the fact that I couldn’t see how Facebook was going to generate a positive cash flow.

    Like or Dislike: Thumb up 2 Thumb down 0