Facebook IPO

Flop doesn’t mean more rules needed

A month ago Facebook became a publicly traded company. A runaway worldwide leader in social media, with a lot of hype surrounding the story of its founding by Mark Zuckerberg, its underwriter committed the grievous sin of overreaching in its expectations for the company’s per-share price at its unveiling. Thirty-eight dollars immediately turned out to be too rich, and at the same time, too much stock was available.

During opening day, as it saw what was happening, Morgan Stanley worked to improve the price up by making purchases. That could not be maintained, and in a few days, Facebook’s price was down about 25 percent. It is still down.

The millions of dollars – billions in total – in expected stock profits did not materialize.

That is not supposed to happen in an initial public offering. Fifty percent price increases, on the initial day, are not unusual, and were predicted by some for the Facebook IPO. The significant IPO “pop” is almost guaranteed, and only those on the inside profit. IPO shares go to the underwriters’ favored associates and clients, usually institutional and hedge-fund investors. Some shares might trickle down, but few investors have an opportunity to share in the quick return.

IPOs are a time for financial firms, through underwriting fees and stock-price increases, to make a lot of money and to significantly reward business friends. Facebook’s $38 per share equals a market value of $16 billion, third-largest IPO behind VISA at $20 billion and General Motors at $18 billion.

But because Facebook’s IPO did not make the millions select investors expected, a committee in Congress wants to know why and how to prevent that from happening again. The House Committee on Oversight and Government Reform is focusing on the need to rewrite 1933 securities legislation to give underwriters less independence (and thus presumably more realism) in determining an IPO’s opening price.

We think the committee should call a halt to this misguided effort. Congress should recognize the Facebook experience as what happens in the marketplace.

Every day, the buying and selling of stocks is based on the give and take of the market. Purchasers see an opportunity, while sellers believe better opportunities lie elsewhere. Many times, buyers and sellers misjudge and pay too much or sell for too little. Shouldn’t Morgan Stanley and the institutional investors who expected to make a quick profit be allowed to get it wrong, too?

The committee’s work will not benefit the 100-share holder who wants to put Facebook stock into his IRA. They do not exist. The initial pre-public Facebook shareholders, many of them founders and employees, now are multimillionaires – at least – without the $38 price or the further increase that in the past has come by the end of the day. Morgan Stanley has egg on its face, but it has been paid its fees, again in the millions. Institutional investors have lost money, but they need to know that when it comes to IPOs the market does not always go up.

IPOs do not deserve federal intervention to further guarantee their profitability. In this sector of the financial world, it is just fine to let the big fail on occasion.