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The Facebook Debacle

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On May 17 th , Facebook had its long anticipated Initial Public Offering (IPO).  It sold shares at $38 each, giving it a market valuation of $104 billion.  For an instant, Facebook was the 23 rd most valuable company in the US.  The ensuing debacle serves as a metaphor for the US in general.

Facebook is an eight-year-old social networking service that has over 900 million users worldwide.  It's a convenient way to maintain contact with family and friends -- for example, to post photos of your new relationship or grandchild or pet.

There's nothing wrong with Facebook selling stock in order to raise money and compensate its employees and investors.  It's the dream of every entrepreneur to start a company that one day becomes successful, has an IPO, and makes its founders wealthy.  It's the nature of the free market.

But in this case there was a serious problem with the valuation of Facebook stock. On May 17th Bloomberg Financial Services reported that at $38 per share, Facebook would be "the largest company to go public in the U.S. by market capitalization" Facebook's valuation is worth the combined market capitalizations of News Corp., Time Warner Inc. and CBS Corp." At its offering price, Facebook was worth more than: Amazon, McDonald's, Cisco, Comcast, Visa, and Citigroup, among others.  On May 17th Facebook ranked in the top 10 of technology companies; Facebook was worth roughly half of Google, the company it is most often compared to.

Then the bubble burst.   As soon as Facebook shares (ticker symbol FB) were available to the public, the price began to drop.  As of this writing, the stock price is $26.31 and the market value is $56.25 billion.

The Facebook Corporation, and those employees and investors who sold FB stock on May 17th, got a good deal at $38 per share.  So did the IPO underwriters, who received a fat commission.  But little investors -- those who were hoping that Facebook would quickly become another Google -- got burned.

The stock market and most Americans have been in a funk because of the lethargic US economy, characterized by persistent high unemployment, and the financial crisis in Europe.  Financial analysts had hoped that the Facebook IPO -- a highly visible, much anticipated event -- would cheer up Americans and rekindle their interest in the stock market.  Instead it contributed to the economic malaise and reconfirmed some of our worst fears about the financial community.

Why did the Facebook stock price fall?  Writing for CNN Money, Julianne Pepitone had three explanations.  First, on the morning of May 18th -- when Facebook opened public trading on NASDAQ -- there was an unprecedented trading glitch, "that left investors unsure about how many shares they bought or sold, and at what price."  Second, on May 24th a lawsuit was filed, "alleging that important information about Facebook's financial outlook was "selectively disclosed' to big banks ahead of the IPO."  Reuters reported that four major Facebook IPO underwriters -- Morgan Stanley, Goldman Sachs, JPMorgan, and Bank of America -- "received privileged information about Facebook's financials -- information that wasn't shared with regular folks" the lawsuit alleges that Facebook told analysts at its underwriters "to materially lower their revenue forecasts for 2012."  Finally, Pepitone noted that Facebook's IPO price, $38, gave it a valuation that many analysts felt was "remarkably high given Facebook's financial fundamentals."

Writing in the NEW YORK TIMES, Nathaniel Popper observed that the Facebook debacle reinforced American sentiment to get out of the stock market.  "The portion of Americans invested in the stock market dropped this year to its lowest level since Gallup started asking, every two years, in 1998."  Popper interviewed a Madera dairy farmer who said, "watching the Facebook offering had confirmed all the fears and suspicions that led him earlier this year to take out the savings, in the five figures, that he and his wife had invested in stocks and stock mutual funds and move the money into real estate investments.  -- "We've lost trust in the whole scenario.''

Eight years ago Americans trusted the financial community. That was one of the factors that spurred George W. Bush's effort to privatize Social Security.   Now that trust has evaporated.

The Facebook IPO reinforces the widespread perception that the people who run Wall Street can't be trusted. In October a CNN/ORC Poll asked, "Overall, how much do you trust Wall Street bankers and brokers to do what is best for the economy: a great deal, somewhat, a little, or not at all?"  54 percent responded, "not at all."  Polls like this, and Occupy Wall Street, indicate that most Americans feel that the nation's financial system has been tilted in favor of the rich and powerful.

There will be many possible themes for the 2012 Presidential election -- jobs, women's rights, and religious tolerance, among others.  But a central theme should be "who do you trust to clean up Wall Street?"  President Obama has enacted modest reforms to police Wall Street.  Mitt Romney wants to repeal them. 

The Facebook debacle indicates that there is more work to be done before Americans can return to the stock market and trust that the financial community operates in the best interests of all the people, not just the one percent.

 

Bob Burnett is a Berkeley writer. In a previous life he was one of the executive founders of Cisco Systems.
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