WASHINGTON, May 20, 2012 – Friday was chock full of wild and wooly Wall Street action. Bulls and market optimists eagerly looked forward to the likely positive effect that the morning’s massive Facebook (FB) IPO was bound to generate, just the kind of tonic the market needed in the face of the continuing Greek implosion.
But what the bulls got was, well, a lot of bull. After opening later than the NASDAQ predicted, FB, after an initial 18% crowd-pleasing pop, had all it could do to hold its $38 offering price into the close where its last trade clocked in at $38.23. FB fans were left to wonder: How could things go so terribly wrong?
Easy. Greed and stupidity took center stage, and most of the players screwed up, leaving new investors holding the bag, which they often do these days. And, if the truth were told, probably always have. Plus, the current, Euro-inspired bear market refused to released its death grip on Wall Street which made matters worse.
Let’s take a brief look underneath the hoodie of this underwhelming IPO.
The Media Hype
In over thirty years of investing, this writer is hard-pressed to recall any IPO that received even a tenth of the media hype that Facebook has. From the day, well over a year ago—when the very thought of running the book on a sexy Facebook IPO was but a wistful gleam in every investment banker’s eye—to the past week, where Facebook IPO media cheerleading resembled in every way the annual, inescapable media flogging of SuperBowl XXXXXX, the whole world of Facebook competed neck and neck with Kim Kardashian in the Media Overkill Sweepstakes.
CNBC—which, detractors aside, is a useful site for investment stats and information if you can get beyond the advisors and hedge fund managers who can’t resist talking up their book—was perhaps the most egregious defender. Hard on the heels of its idiotic, annual shilling for Earth Day, CNBC was ruthless in its coverage of this IPO. In the two-day run up to the actual IPO, Thursday and Friday, it even annoyed fans of its website by imposing a Facebook-only mandatory dropdown menu that put the rest of CNBC’s homepage out of site for users looking for more mundane info, like how their stocks, the indexes, and the averages were doing.
Fox Business was an improvement. But this site has suffered for a long time from a lack of bench strength, so there was no solace there, as they don’t have a lot of useful info on anything.
CNBC’s coverage, both on the Web and on the air, was frankly embarrassing. Facebook’s primary target audience—young people roughly the age of the company’s founder, Mark Zuckerberg—is generally not a target of Facebook’s youthfully-skewed demographic. So all this hyperkinetic coverage seemed almost like a self-parody, making CNBC’s correspondents look like a bunch of aging Baby Boomers trying for one last time to look hip. The ruse failed big time, annoyed viewers looking for real news, and left the network looking like a bunch of over-the-hill fools.
The result: by the time the IPO actually happened, terminal viewer fatigue had already set in. The excitement was gone before it started, and retail investors—the usual bag holders for the detritus of such lousy touts—tuned them, and the IPO out, robbing the aftermarket of the useful idiots who usually drive hot stocks up.
Mark Zuckerberg as the Second Coming
No, we’re not trying to be sacrilegious here. This is simply an accurate metaphor for the nature of the hype described above. To listen to this stuff, you’d think this 28-year old entrepreneur was already the greatest American businessman who ever lived, easily eclipsing the poor pitiful efforts of earlier industrial titans like Andrew Carnegie, Thomas Edison, Henry Ford, Bill Gates, and, no doubt, even the late and nearly-canonized Steve Jobs.
Better yet, particularly in the last week, the media has taken to worshiping Mr. Zuckerberg’s sacred garment, his ubiquitous hoodie. Is it because this outfit makes this new American god look more like your average OWS denizen—very counter-culture? Maybe. But it also deliciously resembles the favored raiment of a certain, late Floridian, perhaps creating a secret, knowing frisson up and down the spines of “progressive” media meme-peddlers. It’s just politically incorrect to suggest it, so they’re not telling.
But, superhero costuming aside, the media is excited that it may have discovered the latest young genius fated to preside over the next generation’s 1%. Our new Superman must be devoutly admired because media heroes always need to be young, smarter than previous generations of media heroes, and ready at a moment’s notice, to utter Great Truths that even the Dalai Lama hasn’t thought of yet.
It’s all silly really. For all we know, Mr. Zuckerberg is an authentic genius. But he also might be one really lucky dude who won’t have a second act. We’ll know in about ten years.
But this is for sure: Unfortunately, sooner or later, like other secular gods, Mr. Zuckerberg will ultimately not be able to live up to this media hype. This will lead to the predictable follow-on story of his Epic Fall from Grace. This entire overblown buzz-thing could very well cause Facebook’s stock some real problems during next week’s trading, as we shall soon see.
The ever-growing size of the Facebook IPO
In a nutshell, up until about a week ago, investors were expecting a modest number of shares in this IPO, following the pattern of recent tech IPOs that kept share counts low to create scarcity and create a bigger pop after the open. Facebook’s underwriters were canny, almost beyond belief. In most of the recent IPO syndicates, investment bankers pulled this low-share count trick again and again, mostly successfully, causing huge initial pops in IPOs ranging from Groupon to Zynga.
These big pops, in turn, generated massive anticipation about what would happen when mighty Facebook went public. If pipsqueaks like Groupon and Zynga could generate such immense initial pops, God only knew how high Facebook would explode. This was the myth that had been carefully manufactured.
Of course, what the press only rarely reported was that, not long after their relatively spectacular IPOs, Zynga and Groupon got pancaked as original investors bailed. (Linked In remains one of few relative successes in this area.) What remained in the public eye was perception of their original success.
The extant positive PR served keep interest in Facebook at a fever pitch. Hapless investors in many of these earlier social media companies had simply been the sacrificial lambs in the big, orchestrated invetment banker buildup to Facebook. An eager financial media gave them a hand.
Making matters worse for the small potential investor, however, was the increasing size of the Facebook offering. As early investors in the company (holding insider shares) watched the IPO being conjecturally priced higher and higher, many decided to throw a goodly number of their own shares into the offering to garner a big, guaranteed payday, as their shares had been purchased at a fraction of the offering price. (We are not privy to these numbers, as they are not required to be made public.)
What happened next was almost a crime. As the number of shares available for the IPO steadily increased over the past week, the “scarcity” game that’s generally been played to goose the price of social networking IPOs withered away for Facebook. At the same time, the underwriters kept pricing the IPO higher and higher as if the scarcity situation still existed. By the time the stock was set to open, there was no real scarcity at all. There was more than enough to go around.
This was actually good news for the owners of Facebook, the company. IPOs with a gigantic pop are arguably priced too low, and the massive increase in share price on the opening day trade means that the newly public company has ended up leaving a lot of money on the table that could have gone into their treasury.
Underwriters, though, are technically and actually working for the IPO company, not the public. Their job is to price the issue low enough for a modest pop (the investor reward) while high enough so that company X’s treasury doesn’t feel it was robbed and victimized.
Given Friday’s action, it’s clear that the underwriters got Facebook’s owners nearly top dollar for the merchandise. What remains to be seen however, is whether that left enough room for new investors to experience any happiness at all.
Your first clue that the FB IPO might be bad for small investors was the fact that said small investors were actually being allocated any shares at all. Generally, the fat cats, hedgies, and their ilk suck up all the shares, only leaving a few crumbs for the little guys. I’d predicted that in my other column, but all day, people emailed me telling me they’d gotten 50 shares here and there. Good for them, i guess. But to me, it indicated that the syndicate of underwriters might have ended up putting too many shares out there for a king-sized pop.
Friday’s pallied results were very probably a story of Great Expectations gone terribly wrong.
NASDAQ Fail: A botched trading day by all accounts
We’re not going to spend a lot of time on this because much of it is insider arcana. But, to make a long story short, whether it was the managers, the computers, the brokerage houses, the NASDAQ electronic exchange, or all of the above, trading in the Facebook IPO ultimately opened half an hour or more—11:30 a.m. or thereabouts—than when it was expected to start trading.
When the stock actually opened, countless trades were botched, mismanaged, lost, canceled, you name it. The action was such a mess that many traders ready to dive in were made nervous and backed off lest their own trades be badly executed or lost. This ended up killing a lot of interest in trading Facebook on Friday, ultimately leading to a lack of orders.
Word late Friday was that Morgan Stanley, which was managing the book and responsible for keeping the opening day price stable (which the rulebook allows in the case of an IPO) was forced to spend a good chunk of the afternoon supporting FB heavily lest it actually drop DOWN below the $38 offer price which could have been catastrophic.
What happens Monday?
Candidly: We have no clue. Facebook, the stock, is already suffering from media and Zuckerberg fatigue, the latter made worse by the additional hype surrounding the Facebook IPO’s surprise weekend wedding. It’s a one-off, lifetime epic event I’m sure the happy couple will never forget, as they could retire tomorrow and live out the rest of their days on Friday’s publicly-supplied multibillion dollar dowry. Hey, if you can make it, you should take it.
Worse, though, for Mr. Zuckerberg’s company may be the fallout from Friday’s investor disappointment over its first trading day as a public entity. Retail IPO investors fully expected to have a great mini-Zuckerberg Vegas Night funded by their own smaller winnings in this stock, the alleged King of All IPOs. What they got was precisely nothing. For those who didn’t bail on that initial 18% pop, well, they’ll be sitting there Monday wondering if they’ll make their money next week, or if they’ve already flushed their eminently biodegradable life savings into the ecosystem.
(Photo captioning derived from AP release. Photographer’s link is here.)
It’s clear that a lot of smart money got in and out of FB as quickly as they could on Friday when it became obvious that the company’s much-touted expectation of jumping to 60 failed to materialize. It remains to be seen whether thousands more new shareholders will bail after that rather than deal with a downside risk they didn’t anticipate at all.
What would the Prudent Man do? Full disclosure:
Due to running afoul of my broker’s IPO holding period rules on a previous IPO, quite by accident BTW, I wasn’t even allowed to put in for any Facebook IPO shares in my account. So I was prepared to sit this one out. But when the stock plunged back to 38 in the last hour of trading on Friday, I decided to have some fun. Since the market, in fact, has been precisely no fun for the last 3-5 weeks anyway, my thought was to take one of my rare crapshoots on FB, as one rarely gets a second chance to get in on the ground level this kind of wild IPO.
So, close to the close of the market, I hopped in and, in the open market, put on a small position in FB for an average price of $38.015 per share. I am pretty certain that this little roll of the dice will end up in greater or lesser disappointment for the Prudent Portfolio which tried to head for the sub-basement this week. But one never knows in this kind of volatile market.
One way or the other, this little gamble—which is really what it is—will certainly be more entertaining than sitting on a huge chunk of inflation-protected treasurys currently sporting a negative yield if you do the math. Worse than mattress money for sure.
Now that you know my little secret, let’s see how this adventure turns out. If Friday’s scaredy-cats decide to try again on Monday, and swarm the opening bell with market buy orders, it’s party time. If not—well, with the Bush tax cuts scheduled to expire at the end of the year, aka, Taxmageddon, maybe it’ll be time to book some losses early in the season as a hedge against the Federal government’s headlong fall into the immense black hole of its own collective stupidity.
I any event, an investor in today’s market must always perfect his technique for rationalization. That said, the Prudent Man is honest, and will keep you informed on his uncharacteristically foolish move.
Meantime, don’t construe this disclosure as any kind of recommendation for or against purchasing FB stock. Travel at your own risk on this one. FB is an untested stock with a ridiculously high PE and zero track record.
Surely at least some of you remember what happened to a boatload of similar stocks a little over a decade ago, back when the dot.bomb brought the high-flying NASDAQ from the stratosphere down to the earth. Once also viewed collectively as a sort of collective Second Coming, most of these hot Internet stocks and their smart, young, god-like CEOs descended into Hades together, “unexpectedly” as the media love to say.
But they never rose again.
It’s always “different this time.” Except that it never is.
There are reasons why old-timers like the Prudent Man are cynics. See you Monday on Morning Market Maven.
Disclaimer: The author of this column maintains several active trading and investment portfolios and owns residential and investment real estate in Virginia, West Virginia, and Maryland.
Illustrations, charts, commentary, and analysis are only the author’s view of current or historical market activity and don’t constitute a recommendation to buy or sell any security or contract. Views, indications, and analysis aren’t necessarily predictive of any future market or government action. Rather they indicate the author’s opinion as to a range of possibilities that may occur going forward.
References to other reporters, analysts, pundits, or commentators are illustrative only and do not necessarily represent an endorsement of such individuals’ points of view. If specific investment vehicles are mentioned in any article under this column heading, the author will always fully disclose any active or contemplated investments in said vehicles.
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