Saturday, May 26, 2012

The Great Facebook IPO Drama

     Unless you have been living on a secluded mountaintop or at the bottom of the ocean the last week, you've probably heard something about the long-awaited Facebook initial public offering. The stock opened at $38 on last Friday, and after a week of trading it had dropped below $32. The first day it traded there were some glitches that were the responsibility of the NASDAQ. These glitches delayed some orders for the stock from being filled in a timely fashion. The other complaint from investors was the addition of shares in the last week before the IPO and an increase in the IPO price. While this is not totally unheard of, it was slightly unusual. The investors also charge that Morgan Stanley, who was the chief underwriter for the IPO, told certain clients that their analyst had downgraded the value of the stock before the IPO.
     When you add all these things to the hype that was created around the IPO by the media, you had a recipe for disaster. The hype got so bad that CNBC's Maria Bartiromo and Bob Pisani enagaged in the most irresponsible behavior I have ever seen by so-called finanacial reporters; they were making guesses on where the stock would close after its first day of trading. Their guesses were as high as $100 a share, they were giddy with excitement. Of course after the stock collapsed, these two financial geniuses were assigning blame to everyone but themselves, as if they had no part in hyping the value of the stock.
     Now that there is blood in water surrounding Facebook, disgruntled investors have lawyered up in order to blame someone, anyone, for their bad investment. I follow the market everyday and handle (sometimes mis-handle) my own investments. In the weeks before the IPO I found plenty of articles detailing the over-valuation of the company. The very week of the IPO, GM said it was pulling its ads from Facebook because they said they weren't working. The problem with Facebook is that it has to find a way to monetize its 900 million users. This is done through advertisers, which if GM is to be believed, is not the main focus of Facebook, it is their users. This user-centric business model works for companies like Apple and Microsoft where the bulk of the revenue is generated directly from the users, but not for Facebook, whose revenue is generated from advertisers.
     All of this information was available to me as well as anyone else who wished to conduct due diligence before investing instead of buying into the hype. I just wonder if these whiny investors would be demanding that half their money be returned had the stock doubled the first day of the IPO. These investors want the benefits of stock gains but want to be protected by the courts or government regulators from their bad investment decisions. The market works best when individuals and firms are allowed to reap the rewards or suffer the losses of their risky decisions without blame being assigned to someone else.

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