Knives out on Wall Street after Facebook float 'train wreck'

May 22, 2012
Jonathan Harwood

Morgan Stanley, Facebook, Nasdaq and investors all cop the blame as price tumbles


THE KNIVES are out on Wall Street over the Facebook IPO, which turned sour on Monday as shares in the social network plunged 11 per cent and ended the day at just over $34 a share.

The company, its main underwriters Morgan Stanley, investors and even the Nasdaq stock exchange have all come in for heavy criticism.

"This has been a train wreck," one hedge fund manager told The Wall Street Journal. Another financier spoke to Bloomberg and said: "It was like the gang that couldn't shoot straight... The underwriters mis-estimated what actual demand was, and there was pure execution failure coming out of the Nasdaq."

Morgan Stanley has been roundly panned for the way it dealt with the IPO. The underwriters' job is to assess the value of the company, set the price and sell the shares. But they and Facebook decided to boost the size of the share offer and price days before the IPO, and in doing so, according to Bloomberg, ignored advice from co-managers.

Reuters even reported that Morgan Stanley's own internet analyst, Scott Devitt, reduced his revenue forecasts for the Facebook flotation in the run up to the IPO, after the social network itself expressed caution over its revenue growth. The move shocked the markets and could have damaged the float.

It was also criticised for offering too many shares, and in the end Morgan Stanley was forced to buy Facebook stock on Friday to maintain the price. "The firm's traders bought an estimated 30 million to 40 million shares at $38 that day, hoping to prevent the stock from breaking below the offer price," reported the New York Times.

Reuters blogger Felix Salmon said that the underwriters operated what is known as a 'greenshoe option' - allowing them to sell additional shares and manage the price at launch. But he says: "Given where Facebook is trading right now, you can be sure that Morgan Stanley will not exercise its option, Facebook and its investors will not issue those extra 63 million shares, and that in a few days' time, the free float of Facebook shares will be 421 million, not 484 million."

The Nasdaq stock exchange was also criticised for ramping expectations and suffering a technical problem at launch that delayed trading by half-an-hour and caused confusion among investors.

But Cincinnati fund manager Peter Sorrentino said the investors only had themselves to blame.

"I shame the people who were lining up to buy the thing," he told Bloomberg. "The financials were there, do the math. Everyone wanted to be caught up in the glamour offering of the year. People just had stars in their eyes."

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And to think Eduardo Savarin earned the wrath of congress when he renounced his US citizenship to become, instead, a Swiss citizen one all in anticipation of a multi-billion dollar payday.

Once again bankers pricing the deal overestimated the company’s projected revenue growth rate. And Facebook's CFO overestimated investor demand. And Marc Z might have waited another two years until Facebook had a proven track record of making money before initiating a serious IPO. What's that story about the tortoise and the hare?

Once again, absolute and pure greed has blinded the financial sector who have clearly learned no lessons.  They sicken me with their recidivism and I hope they all get burned by this latest show of naked avarice.  To hell with them all!