Face value

The legal wrangling over Facebook's initial public offering (IPO) -- or rather,  over the abysmal performance of the stock since the flotation took place -- promises to provide hours of enjoyment for the neutral spectator in the weeks and months ahead.  There are suggestions that the lead underwriter, Morgan Stanley, may not have told smaller investors that its analyst had downgraded his earnings estimates for the company after the flotation was announced.  Even if that isn't the case -- and Morgan Stanley has been prompt and firm in denying it -- there will certainly be questions asked about whether the underwriters (and Facebook itself) got carried away by the pre-market hype, resulting in an offering that was too large and too expensive for the market to absorb.  

I was never on the equity side of the securities business -- too much flim-flam for my taste -- but one thing I did understand was that when entrepreneurs undertake initial public offerings (IPOs), they're not doing it to make new  investors rich.  They're doing it either to raise new capital to invest in the business, or to enrich  the investors who've financed the company up to the moment of the IPO.  No company wants to see its shiny new stock sinking like a stone, of course, but the alternative is almost worse, at least from the viewpoint of the initial investors (i.e., in the case of Facebook, Mark Zuckerberg and his partners).  If the stock goes up like a rocket as soon as it hits the market, you've left a whole lot of money on the table -- not a good feeling.

It may be that Morgan Stanley failed to control the hype, but it would be wrong to suggest that they created it.  The business media, with CNBC maybe the worst culprits, were drooling with anticipation for weeks.  Assuming all this comes to court, it will be interesting to see whether the ancient principle of caveat emptor wins out,  which it certainly seems to me that it should: nobody twisted anybody's arm to make them buy this stuff.  Then again, I didn't buy any of the stock, so I can afford to say that.

There's one other unusual aspect to this flotation: the movie "The Social Network".  It's a fictionalised version of events, of course, but most viewers would surely have had the slightly queasy sensation that I had, as I found myself sympathising with the unlovely Winklevoss twins.  Anyone who saw that movie and still thought the Facebook IPO would be a bargain really needs to give their head a shake.