Wall Street needs to shed Facebook’s shroud
As Facebook continues its search for a bottom after only eight trading days as a public company, there’s a much bigger problem than the $40 billion in market cap it has lost. The people behind Facebook’s dubious $100 billion-plus self-valuation were apparently as doubtful as the rest of us. At stake is the fate of Wall Street’s soul. To paraphrase Sir Thomas More’s line in A Man For All Seasons: “It profits a man nothing to give his soul for the whole world…” – but for Facebook?
Facebook’s interests are no more aligned with The Street’s than with its members‘. Wall Street needs to take the offense, see the handwriting on the wall and project itself as the ultimate defender of transparent, market principles, which is the only asset it has.
Facebook’s much-anticipated public launch has gone from bad to worse. It priced itself at the high range of $38 and opened 30 minutes late – some 20 of those with traders completely in the dark. Nasdaq has egg on its face and a possible liability in the tens of millions of dollars. Retail investors who bought into the hype are still losing money. Days after the May 18 launch, the tangled mess of positions that may or may not have been taken were still being unwound.
The Facebook fiasco revives the oldest knock against The Street: The little guy doesn’t have a chance. IPOs only reinforce this impression. Retail investors have little or no access to a roadshow, and roadshow presentations are borderline farcical anyway. (Did you catch any important financials in that Facebook roadshow video?)
But Facebook was worse than most. Three days into its roadshow, on May 9, Facebook added some bad news to its main regulatory filing. About one-third of the way into an amended filing with the SEC, Facebook speaks to the most important pillar of its revenue prospects:
Based upon our experience in the second quarter of 2012 to date, the trend we saw in the first quarter of DAUs increasing more rapidly than the increase in number of ads delivered has continued. We believe this trend is driven in part by increased usage of Facebook on mobile devices where we have only recently begun showing an immaterial number of sponsored stories in News Feed, and in part due to certain pages having fewer ads per page as a result of product decisions.
So, Facebook did what it needed to and disclosed, though merely as the law requires. But then it did for the investor class what it wouldn’t do for John Q. Investor. In private talks with a couple of dozen analysts it talked about the revision. What it said or didn’t say is of less importance than the fact that it highlighted the change in guidance for some, but not all.
This, of course, is particularly ironic considering that Facebook’s value is derived directly from its ability to sell things to users – the same proletariat it kept out of the loop. Facebook’s assertion that it is worth 100 times earnings is believable only if it’s obvious how that can be possible. But mobile ads are uncharted territory – a theory many critics argued pre-IPO. In its revision, Facebook was affirming this pessimism, but as quietly as possible.
This is a defining moment for The Street. Facebook is in the hands of the market now, but the financial community needs to get together and save itself from more lawsuits and opportunistic legislators.
At the very least there is a great case to be made for better disclosure, in this Internet age, of material information, especially with new, looser crowdfunding rules that will make it possible for the first time for less sophisticated investors to buy into companies even before they go public. With all the OWS backlash and the elevation of capitalism as a presidential campaign issue, The Street has a chance to rise Phoenix-like from these ashes.
The Street needs to actively go against its short-term interest, and with its better nature, and fight for the principle of transparency in the most volatile of equity investments – because they are also the most exciting to regular folk. Tech IPOs get extensive media coverage and often have a built-in retail base in the very people who use the product or service and thus feel they know the company.
What are the fixes? They include:
Nasdaq making the market makers whole: Yes, that is more than $100 million they don’t exactly think they owe Knight Capital, USB, Citi, and the other institutions that helped sell Facebook shares. It’s also a tiny fraction of the company’s $3.75 billion market cap, and probably needn’t be paid all at once. The benefit? Grumbling brokerages shut up and do their part to make their retail (and, to a lesser extent, institutional) investors whole.
The U.S. appoints a single-point regulator: Sweep aside everything that would get in the way of the rapid oversight the executive branch needs deploy. Whether that person is a special master or a special prosecutor is negotiable. But it’s good for the market to have a government person to blame and take the weight off things. It’s probably good politics for a certain incumbent president, who needn’t demonize “my friend Mark,” to suggest that financial oversight is good, for everyone.
While we’re at it – go public, Zuckerberg: There has to be a way for the person who controls the company unilaterally to step up and assure investors that everything is going to be all right and that FB is doing everything it can and is working with all the responsible parties to make things right, etc. Throw them a bone, or they will really start to believe what they should have realized on May 17: Facebook isn’t worth $100 billion and may never be.
However it happened, however proper it may have been, the institutional failure to highlight – not just disclose – potentially bad material news to an audience larger than big-money insiders is impossible to defend. And everyone with a vested interest in a free market needs to check their ego at the door.
It’s an easy bet that if nobody did anything wrong about the rollout of Facebook, legislators and regulators will decide that new laws and rules are needed to recalibrate the smell test. The Street can lead on this reform, and it should. It needs to, again with apologies to Sir Thomas More, for its own safety’s sake.
PHOTO: Facebook CEO Mark Zuckerberg is seen on a screen televised from company headquarters in Menlo Park, California, moments after the Facebook IPO launch in New York, May 18, 2012. REUTERS/Shannon Stapleton