Griping about the process by which companies go public is a pastime nearly as venerable as the IPO itself. Indeed, it’s a rare deal that makes everyone – the company itself, potential and actual investors and the bankers being paid for undertaking the process – happy. A typical transaction usually results in at least one of the following: underwriters disappointed that they weren’t able to maximize (or hang on to) the fees they earned in the transaction; the company fretting that the IPO was mispriced or that shares are going to end up in the hands of hedge funds who will simply “flip” them; or investors upset that they never seem to get a large enough allocation of the hottest deals.
And then there was the Facebook (FB) IPO, in which pretty nearly everything went wrong. That’s why we now see the rare spectacle of a Congressional committee – the members of which always seem willing and eager to jump on any issue that will get them some headlines and face time on television during an election season – asking the SEC to address a series of questions about the fairness of the IPO process.
Do underwriters have too much discretion? Do affluent clients or institutional investors get an information “edge” over regular folks because of disclosure rules? Is the process of setting the price of an IPO, as it exists today, fair to all potential investors? Rep. Darrell Issa, a Republican from California who heads the House Oversight and Government Reform Committee, wrote a 15-page letter to SEC Chair Mary Schapiro, arguing that the nosedive in the value of Facebook’s freshly minted shares in the month since its IPO is a sign of a flawed process, one in which underwriters “dictate pricing while only indirectly considering market supply-and-demand.”
On the other hand, with the exception of the massive technological glitch at the Nasdaq on the first day of Facebook trading, one could argue that supply and demand worked just fine, thank you very much, and that complaints today about inadequate access to information are simply a way for investors unhappy with the way things turned out to find a respectable way to gripe about it. It’s not OK for them to say that they let their own greed and excitement run away with them to the point where they were willing to buy Facebook shares at the IPO price of $38 a share. But complaining about the IPO process itself is fair game.
The problem is that in this case, the arguments simply don’t hold water. Even if they weren’t among the elite crowd with whom research analysts shared concerns about forecasts for Facebook’s revenues, the warnings about the company’s slowing growth trajectory were all over the Internet. BreakingViews published an entire e-book devoted to the company’s history and business that included a section arguing that the company was overvalued even at $75 billion; the actual price put the value of the deal at north of $100 billion.
Someone going out to buy a used car knows they need to get a mechanic to verify that the seller isn’t making exaggerated claims about the vehicle’s health; a potential investor who fails to do the minimal amount of due diligence on an IPO like Facebook (or who fails to heed the results of even a basic search for information) should be embarrassed to confess that publicly. There is an argument to be made that retail investors can be at a disadvantage to their institutional counterparts during the so-called pre-IPO “quiet period,” but Facebook is a crummy example to use in support of that argument, given the amount of debate and discussion surrounding the pricing. Back to the drawing board, please, Congressman Issa.
The Facebook IPO was all about greed running amok, and common sense taking a back seat – and a severe case of buyer’s remorse on the part of investors of all stripes and sizes. No one forced those investors to agree to pay $38 a share for a stake in Facebook. Morgan Stanley (MS) bankers with cattle prods weren’t standing behind them to demand that they place calls to their brokers demanding an even larger allocation. Had the demand not been there, the underwriters would have kept the price range exactly where it had been, rather than boosting it at the last moment. You can get away pushing the envelope on a smaller deal, but failing to hit on the right price for one as high profile as Facebook has led to the kind of public humiliation that no investment bank would knowingly risk.