Thursday, June 7, 2012

A Salve for the Facebook IPO Debacle

Yesterday I wrote about my dismay with how the recent IPO for Facebook was handled.

It's not only that the stock is off by almost one-third since May 18, when Facebook first came public.

After all, despite yesterday's strong rally, the stock market has been struggling in recent weeks. 

No, in my opinion, the real problem is that the public has apparently been played for a sap.

The big institutions were quietly warned by company management about some disquieting news in Facebook's mobile search advertising, so they backed away from buying shares.

Senior management at Facebook and most of its original investors took advantage of the hype to sell even more shares that they had originally indicated, thus creating the image (fairly or not) that they knew that Facebook was overvalued at the initial offering price.

The only group not informed about the company's apparent slowdown in advertising revenue was the general public, which eagerly snapped up whatever shares were available and now feel abused.

Lawsuits are now flying around, as would be expected.  Nasdaq announced this morning that it is setting aside $40 million to cover the operational issues that arose during the day of the Facebook IPO.  There are also indications that the underwriters will be facing their own legal issues, not to mention senior management.

I don't have any issue with company founders realizing some profits.  Facebook has obviously been a fabulous success, and potentially could be an internet powerhouse for years to come.

It would be naive to not expect that largest shareholders of Facebook not look to monetize at least a portion of their private holdings at the best possible price.  Moreover, no one had to buy shares of the company - investors were hoping to make a large profit, which in this case has not happened so far at least.

But still: It would be nice if some of the people that reaped hundreds of millions - if not billions, in the case of Mark Zuckerberg - gave at least some signal that they felt that the recent drop in stock price was not warranted.

Just think:  if senior management of Facebook announced that they were taking some of their personal funds to buy shares in the open market, imagine the signal that would send.

Unlikely? You bet.  But there is some precedent.

Here's a story that comes from Robert Cringely's book written in 1996 called Accident Empires: How the Boys of Silicon Valley Make Their Millions, Battle Foreign Competition, and Still Can't Get A Date.

As you can tell from the title, Cringely's book is an amusing yet terrifically insightful book about the tech industry in the 1980's.  Public Television also did a mini-series based on his book titled "Triumph of the Nerds".

In any event, Cringely tells a story about Steve Ballmer, who in the late 1980's was a senior executive behind Bill Gates at Microsoft (Ballmer has since ascended to the CEO spot).   Here's an excerpt:

The Age of Microsoft dates, I believe, from a moment in 1989, when executive vice-president Steve Ballmer borrowed some money.  Prior to that moment, Microsoft had all the elements necessary for global digital dominance except the will to make it happen.  Ballmer's mortgage signified that there was finally a will to go with the way...

{Based on what he was seeing}, Ballmer took a chance.  He borrowed everything he could against his Microsoft stock, stock options, and his every other possession.  In all, Ballmer was able to borrow $50 million and he used every cent to buy more Microsoft shares...

There's something about betting every penny you have in the world that helps with focus, and Microsoft has been very focused during the 1990's.  As a result, Steve Ballmer is now Microsoft's third billionaire, joining Bill Gates and Paul Allen.  His shares have increased in value by twenty times since 1989.

I love Ballmer's story from two aspects.

First, it is rare to find anyone that believes enough in his company and its future to borrow everything to buy more shares as Ballmer did.  I have often wondered whether I would have done the same if I had been at Microsoft in the late 1980's - I doubt it.

And second, it sent a very powerful message to the stock market, which is why I think that Facebook should at least consider doing the same today.