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How Social Was the Facebook IPO?

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After all the press pumping up the market, Morgan Stanley produced the paper, Facebook’s Initial Public Offering (IPO) was released to the market last Friday. Unless you live under a rock, or have been hiking in the Alaskan wilderness for the past week, you have probably read or heard about the Facebook IPO fiasco, and the resulting lawsuits. The projected price of the stock by many accounts was that it would settle at $38 and some change on opening day and, ultimately, it did, finally close at $38.23. According to an account on CBS Evening News, “Banks backing the deal were raising the offering price.” But upon issue, the stock rose and then faltered. Now, everyone wants to know how that happened and why! More than 100 million shares traded hands! Remember, the social media website company, Facebook makes most of its money through advertising on its computer-based connections. Facebook recognizes that it is difficult to make money off of advertising to its subscribers via mobile devices.

The sell-off of Facebook is apparently continuing; it closed at $33.03/share on Thursday, May 24, nearly $5 below the IPO. John Belmont of the Associated Press noted that before the stock’s issue large asset managers were not convinced the original pricing was justified. Did the demand for the stock justify the allotment of 421,000 shares? Belmont interviewed asset managers who indicated the initial pop expected did not materialize and the value of the stock this week had sunk 19% since its open. Even Robert Greifeld, CEO of the NASDAQ, said that he believed there were mistakes within the Facebook listing.[1]

According to an article in the May 22 Los Angeles Times, one theory is “Morgan Stanley may have shared negative reports about the stock’s pricing with some institutional investors but not others”[2] ahead of the IPO’s release. If true, it will be a matter for FINRA and the SEC, says Rick Ketchum, Chairman and CEO of the Financial Regulatory Authority.[3] On the heels of what happened at JP Morgan Chase, to see such financial finagling may make investors a wee bit squeamish. So squeamish, that the top securities regulator for Massachusetts, William Galvin has subpoenaed Morgan Stanley. So did investors with more info sell the stock before other regular stockholders?

Did they sell more stock than they told the public they would?[4] It will be up to the SEC and FINRA to scrutinize steps leading up to the trade and separate the wheat from the chaff.

Mark Zuckerberg noted that Facebook’s mission is to make the world more open and connected. I wonder if he will feel the same after Morgan Stanley is scrutinized by the SEC and FINRA? Was this a transparent process, designed to allow regular folks (who comprise the vast majority of Facebook’s subscribers) a fair shake? The bottom line appears to be that the big boys made it certain that they would make money, and the issue is whether they broke the law in doing so. The jury is out, but Morgan Stanley and Facebook have some explaining to do.



[1] “Regulators Probe Bank’s Role in Facebook IPO”, Gordon, Marcy, ABC News, May 23, 2012, http://abcnews.go.com/Technology/wireStory/regulators-probe-banks-role-facebook-ipo-16410086

[2] “Regulators Looking Into Morgan Stanley Role in Facebook IPO–Facebook Shares Continue Negative Slide,” Tangel, Andrew and Puzzanghera, Jim, The Los Angeles Times, May 22, 2012. http://www.latimes.com/business/money/la-fi-mo-morgan-facebook-20120522,0,5956937.story

[3] Op. Cit. “Regulators Looking Into Morgan Stanley Role in Facebook IPO”.

[4] Op. Cit. “Regulators Probe Bank’s Role in Facebook IPO”.