Facebook Blame-Game: Who’s at Fault for IPO Debacle?

It's too simple to blame any single entity. All parties bear responsibility. Investors are angry, but they should look in the mirror.

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Jim Urquhart / Reuters

Facebook Chief Executive Officer Mark Zuckerberg attends the Allen & Co Media Conference in Sun Valley, Idaho, July 12, 2012.

The fallout over Facebook’s controversial initial public offering has turned into a full-blown blame-fest. In the three months since the social network’s mammoth IPO, the company’s stock has fallen by a stomach-churning 50%, wiping out some $50 billion in shareholder value. The offering was supposed to be a triumphant moment for Silicon Valley and Wall Street. Instead, between trading glitches on the NASDAQ exchange, accusations of “selective disclosure” against Facebook’s bankers, and the precipitous stock decline, the whole thing has turned into a debacle of epic proportions. So whose fault is it? Facebook CEO Mark Zuckerberg? Company CFO David Ebersman? Facebook’s Wall Street bankers? Naive investors and their financial advisers? The short answer is that it’s too simple to blame any single person or entity. All parties in this mess bear responsibility, although each in different ways.

The latest round of agita began on Monday when New York Times columnist and CNBC host Andrew Ross Sorkin penned a piece in which he took direct aim at Ebersman, Facebook’s (supposedly) wunderkind 42-year-old chief financial officer, who was the company’s point person on the IPO. Sorkin makes a pretty persuasive case for pointing the finger at Facebook’s CFO: It was Ebersman who pushed the offering price higher, from a range of $28 to $35, to $38 per share, a level that looks ridiculously high in retrospect. It was Ebersman who lobbied to sell 25% more shares than originally planned, apparently convinced there was enough market demand to absorb the additional volume, a view that also looks ridiculous in hindsight. And as Sorkin pointed out, “as the point person for investors, [Ebersman] has done little to articulate how or why the company’s strategy will lift the stock price any time soon.” Nobody is accusing Ebersman of illegality here, he was just woefully, catastrophically wrong in his assessment of the market demand (and the appropriate price) for Facebook shares.

(MORE: Why Wall Street Loves Apple and Google as Facebook and Friends Flail)

Sorkin’s piece generated strong reaction, as any good column should. The outspoken billionaire entrepreneur Mark Cuban wrote a blog post saying Sorkin was “180 degrees wrong” and laying blame at the feet of investors and their financial advisers. “The CFO’s job is not to manage shareholder portfolios,” Cuban wrote. “His job is to help Facebook succeed.” There’s some merit to this argument. Stock market investing, especially where the companies are hyped-up tech firms, is not child’s play. Caveat emptor applies, in spades. Even Sorkin acknowledges that the disclosures provided in Facebook’s IPO prospectus were “for the most part, pretty transparent.” It is the investor’s responsibility to read the prospectus, and if they’re smart, consult with a financial adviser before buying stock. However, investors have a right to feel sour toward Ebersman because by pricing the IPO at $38, the company was signaling that it felt that level was a reasonable price for the stock, when it was nothing of the sort.

Over at Forbes, tech commentator Eric Jackson took the opposite view from Cuban, writing that Sorkin “gets it exactly right,” by throwing the book at Ebersman. “Yes there are many people involved in taking a company public at a $100 billion valuation,” Jackson wrote. “But at the end of the day, there’s one person accountable for the IPO process: the CFO.” Jackson then goes on to blame Zuckerberg for the departure of Gideon Yu, the respected Yahoo and Google veteran who was Facebook’s CFO until his departure three years ago. As Jackson pointed out, Yu pushed Zuckerberg to ramp up Facebook’s monetization (in other words to focus more on making money) but as we know, Zuckerberg was more interested in growing the user base and preserving the user experience. “Perhaps if Gideon’s concerns had been more fairly listened to and addressed back in 2009, we wouldn’t be where we are today with $50 billion in market value eviscerated in 3 months,” Jackson concluded.

(MORE: Facebook Hits Record Low as Insider Stock Sale Lock-Up Period Ends)

Moving back to the “lay off Dave” side of the ledger, we have the inimitable Henry Blodget, who knows a thing or two about Wall Street and technology stocks. For months, Blodget has been banging the drum for investor responsibility, and he’s got two recent posts driving that point home. In a nutshell, Blodget argues that if investors had actually read Facebook’s IPO prospectus (and hopefully discussed it with a professional financial adviser) they would have seen a number of warning signs. Such as: Facebook’s revenue growth was slowing, and users were increasingly accessing Facebook on harder-to-monetize mobile devices. Perhaps most importantly, Zuckerberg made it crystal clear that he cares more about Facebook’s social mission “to make the world more open and connected” than he does about making money. Throw in Zuckerberg’s iron-clad control over the firm (which has been criticized by corporate governance experts) and you had a recipe for extreme caution. But everyone, from Wall Street banks to average investors to, yes, the financial press, was so caught up in the Facebook hype (it’s the next Google!) that their judgment was clouded.

Here’s the bottom line: Facebook’s IPO was not a failure, per se, at least not for the company itself. The offering raised $10 billion for the social networking titan. That, after all, is what initial public offerings are designed to do. Was the IPO mispriced? Without a doubt. Did the hype get out of control? Unquestionably. Has the company’s post-IPO stock performance been abysmal? To say the least. Sorkin makes some good points, and Ebersman was clearly wrong about key aspects of the IPO, most notably his calculation of an appropriate offering price and his assessment of market demand for the stock.

But it’s just too easy to blame Ebersman alone for the debacle, and it lets investors off the hook, which is the last thing we should be doing here. Investors need to understand that investing in the stock market, and especially hyped-up tech IPOs, is very, very risky. At the end of the day, investors need to take responsibility for their decisions. They may not be happy about it, but no one is going to bail them out, so they better get used to it.

As for Facebook, the company is clearly starting to get a little stressed-out about the tanking stock price and torrent of criticism. Seeking to boost confidence, Facebook announced Tuesday that Zuckerberg will not sell any of his shares for one year. That move sent the company’s stock price 5% higher on Wednesday, but it still remains nearly 50% below the IPO price. What Facebook needs now is to put together a string of solid quarters of financial performance, if it has any hope of seeing its stock price return to anywhere near the IPO level.

MORE: Social-Media Meltdown

45 comments
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toprover
toprover

NASDAQ is changing FB's trading symbol tomorrow to AB!  Okay, okay, if you must know.  It stands for ABOUTFACE!  The new un-social media giant, where investments evanesce! This stock will forever be tainted so long as Putzberg is at the helm!

toprover
toprover

NASDAQ is changing FB's trading symbol to AB starting tomorrow.  Okay, okay...if you must know, it stands for ABOUTFACE, as it should be called!  The new un-social media giant, just watch your investment evanesce! This stock will forever be tainted so long as Putzberg is at the helm!

dps3957
dps3957

Whose fault is for Facebooks price? The Market. There is an old Wall Street saying, Bears make Money, Bulls make Money, and PIGS get slaughtered. We are watching the Facebook PIGS at the Slaughter House.

Greekgeek
Greekgeek

I still take great personal satisfaction in having sensed this trainwreck coming and refusing to buy shares when my EdJones agent asked me about it in May: http://www.squidu.com/forum/vi...

I rejected the pre-IPO hype partly because I didn't like Facebook's ethics, but also because I knew just how lousy FB's monetization system was— since it's basically a large-scale version of how I make money online, through ad space in the sidebar and headers of content I publish.

It does work — I got a $770 paycheck yesterday from one of the websites where I publish, down a bit — but it's hardly the stuff Wall Street fortunes are built on!

Godzilla1960
Godzilla1960

Money for nothin' and your chicks for free.

John Buso
John Buso

Can't blame Ebersman. Wasn't this his first IPO?

 

Can't blame Zuckerberg. Did he have any IPO experience?

 

What about those between the "consumer" investors and the company issuing the stock? The big underwriters may have lost a lot, but I bet the guys who made the real mistakes took money to the bank in buckets.

ProwdLiberal
ProwdLiberal

I blame the American stock buyers for Facebook IPO debacle. The problem with an average stock buyer is they fall for the hype time and again. They haven't learned from the dotcom bust that the American stock market is rigged by the wall street and other investment firms. They make an average stock buyer think that if they don't buy a stock at the hyped/rigged price they are going to lose big. They create a psychological  fear in the minds of an average stock buyer that others are making a lot of money and they are missing out on something big. Actually the people who make money in the stock market are the wall street companies not an average Joe. So the blame goes to an average investor for being a sucker time and again to the games played by the wall street con men.

vstillwell
vstillwell

Where else are they going to invest? A bank CD? Please! Fed interest rates are near zero I believe. Real estate? That was so last decade. The only place left to invest is the stock market. How many people have time on their hands to learn the finer points of financial statement evaluation and reading between the lines on IPO filings? I don't. This is what happens when the economy becomes centralized into a few power players hands. There aren't many places left to put your money to work. 

ProwdLiberal
ProwdLiberal

I agree with you very much but the average investor should not make the same mistake again and again which is buying the wall street hype lock stock and barrel. But unfortunately what I see time and again the average Joe falls prey to the same old snake oil sales techniques of wall street con men.

owl905
owl905

The Facebrook monkey belongs squarely on the back of investors.  It had Do Not Enter on the analysis and on the warnings from analysts.    The price was an invention, and the guardrails against transparency grew bigger as they got closer to the heart of the company.

And in the ain't over till its over world - watch the headache factor set in as people get over the 'joy' of dozens of Facebook thingies in their face on a  daily basis.

pinfiniti
pinfiniti

Wouldn't it be Obama? Poor guy.

ChrisIK
ChrisIK

The entire public is so cynical... Just because the stock is dropping, everyone just wants to find the blame and put it on someone. Well the blame should go on the PUBLIC who were obsessed with purchasing facebook stocks, and hoping to achieve immediate wealth! Those are the ones who should take the blame, no one was forced or threatened to buy a single stock. It's just funny seeing facebook shifting from being called one of the best/fastest growing companies in history to being called the worst IPO ever. Just because the public is not happy with the company's performance, they want to turn against someone. Mark is a brilliant leader, and he is the sole reason facebook went from being a simple website to a worldwide company still worth about $50 billion, and even though that's half of its IPO, that is still VERY impressive. All the public wants to do is look at Mark's flaws and severely emphasize them rather than looking at his remarkable achievements. There is such arrogance in public. Instead of giving a struggling company hope, the only things done by the public is writing ridiculous articles saying "Who should be blamed for this...". Such arrogance and pessimists in the public.

jay jay
jay jay

Gee, is it possible that LinkedIn is a far more useful and revolutionary idea than Facebook? LinkedIn helps you ge the job you want. Facebook helps you lose the job you have.

IQMinusOne
IQMinusOne

"Facebook helps you lose the job you have."

So does LinkedIn when your boss finds out you have the option of "career opportunities" turned on.

Ande
Ande

it's apples and oranges and a totally different business models...fb will rise again, it's too engrained with the masses as a communication and expression tool.

Ande
Ande

there is definitely one entity to blame in all this. that is the investor who bought the overvalued stock. it's only their fault and no one else's, not the banker and not fb. no one was forced to buy the stock so why all the crying.

John David Deatherage
John David Deatherage

Starry eyed investors were buying a dream, not a dreary reality.  In the end, investors have only themselves to blame.  It's still not clear how FB can turn free users into income....  Until that becomes clear, FB is wild eyed speculation; the "greater fool" theory at work.....

Marc Simony
Marc Simony

1) The article doesn't really answer its own question, but at least it's a nice collection of other people's opinions.

2) I cannot reconcile Henry Blodget's outrage at insider information trading (http://is.gd/rococe) with his statement that all the signs and data were there for everyone to see.

3) I also haven't figured out who is to blame, but mused on it myself a short while ago: https://marcsimony.wordpress.c...

CharlesCU
CharlesCU

Who is to blame?

Doesn't the self-satisfied smirk in the image at the top of this article tell you everything?

Biswajit Mazumder
Biswajit Mazumder

If anyone should be blamed, it should be the media! Doesn't anyone remember the amount of media hype surrounding the IPO? The countless interviews, the continuous updates, the countdown? I remember watching and listening to interviews with even school kids in investment clubs! Radio, TV, Internet, the IPO was everywhere, no one could escape it! 

There have been so many other IPOs in the past, none of them received this kind of misdirected attention. The media invented the news and hyped it up, just because it was FB IPO; something every FB user could identify with, and they could gloat over with some good viewership numbers!

Lost Kidz
Lost Kidz

Stories fuelled by the  Wall Street giants offering their wealthiest clients 'exclusive access to pre IPO Facebook stock'...  Emporers new clothes anyone?

drorbenami
drorbenami

the problem is that, basically, all people, not just americans, are criminals. it is very nice to blame the banks and wall street for all the recent problems, but who works on wall street, robots??? wasn't that the big argument against the 9/11 conspiracy theory? Such a big conspiracy needs many participants, yet no one has come forward and confessed. Yes, well, who on wall street has come forward and said that his firm participated in illegal trading or banking practices ? tens of thousands of employees, on both sides of the atlantic, yet not one person  has come forward.

recently, i purchased a course on public speaking which was made up of lectures given to a live audience. in this course James Malinchek taught his students had to falsify resumes, create phoney photographs, makes mis leading statesments, etc., etc. Then he would stop and actually ask: "well, maybe i am going too far, do you want me to continue?" and the students would all scream out: "yes, yes, tell us more..."

In conclusion....facebook investors are crybabies....people lie, cheat and steal from each other every day, that's okay......it is only when "I" get caught holding he short straw, do i then want justice......

Arun George
Arun George

Have you seen FB's P/E? They are 50% down and its still 105.8, can you imagine that????FB's actual share value is 3-5$ and thats where its headed by December.

bhayzone
bhayzone

Amazon has a PE of ~315 and five years ago it had a PE of ~107 - would you have suggested dumping Amazon stock at that time? Salesforce has an infinite PE ratio - do you suggest dumping Salesforce too?

 PE is not the best of indicators of company / stock performance. The

best use of PE is to compare it with other companies in the same

business.

Mike259
Mike259

Maybe not, but if you were buying a business to run, would you pay 315 times earnings? I doubt it because you would never be able to service debt or get a decent return on your investment.

Professional firms sell for .8 to 1 times earnings. A distributor can from from 2 to 10 times earnings. 

Stock market runs on rules that defy common sense. And when things go wrong everybody is looking around wondering what happened?

Mir Ahsan
Mir Ahsan

It's simple really, the company is young and it's product is getting shaky. It's all in Facebooks hands now. They need to get back in the ring and fight it out.

blinkuldhc
blinkuldhc

Also, "judgement"?

And you kind of missed a digit on the actual amount Facebook raised via IPO ($100 billion vs. "$10 billion").

These would be inexcusable errors in a college paper; in a Time article? Egreejus!

bhayzone
bhayzone

 Facebook never "raised" $100B, with its IPO. Facebook was "valued" at over $100B. The value raised in an IPO refers to the amount of cash the company actually received - and that number is closer to $16B.

"Facebook sold 421.2 million shares to raise

$16 billion yesterday, giving the company a $104.2 billion

market value."

http://www.bloomberg.com/news/...

Sam Gustin
Sam Gustin

 Thanks for the correx, appreciate it. S

blinkuldhc
blinkuldhc

"So who's fault is it?"

Seriously, Time?

Monsignor Rory
Monsignor Rory

Me, that's who. That's what they get for banning Rory Kasel. 

Sólyom Csaba
Sólyom Csaba

I'll be curious to see the time when the lockdowns end on a ton of stocks sometime in November I think... FB value might just take yet another deep dive when all those papers get back into the market.

Tohmsa Hatrman
Tohmsa Hatrman

Why is it a debacle? For the first time the public did not buy the hype. That makes it a debacle? I would call it common sense applied (for the first time).

Catherine Haig
Catherine Haig

the only reason it didn't sell is because most people don't have time or the money to buy shares. The rich don't know what they are doing - they have the money and keep making more and more of it while the rest of us struggle. One day this way of doing business is going to implode for good. And then we'll see some interesting stuff go down. No more rich people and they have to live their lives on the rest of the world's social values...oooh  yeah - interesting - they will not survive.

Sólyom Csaba
Sólyom Csaba

Did not buy the hype? Quite the contrary, the problem is that they did buy the hype (quite literally)... and now that the hype-cloud is over, lots of ppl realise that the thing stinks and they wanna get out as fast as they can.

jon_k101
jon_k101

So Facebook shares go up 5% as a result of Zuckerberg saying he won't sell for a year.  5% of 50B  is 2.5B. That statement is worth 2.5B??? Stock market is simply...stupid.

Nonaffiliated
Nonaffiliated

No.  What's 'stupid' is the financial press's simplistic attempts to explain what's really going on to people who don't have the time or inclination to understand anyway.

JonathanCE
JonathanCE

I was an inch close to buying FB stock but then I read quite a few articles that were warning people not to buy yet and to let time do its job. So I took the advice. Isn't that the idea behind investors when they do their job?

IQMinusOne
IQMinusOne

Yes, the homework is to know the true value and it's up and down over a period of time.

However, the articles are like the casino encouraging people to participate one way or the other. Casino is not necessarily bad for the gamblers, but almost always good for the house.

beaverorduck
beaverorduck

Excel can be blamed for this debacle.  It is so easy to model a company's projected performance.  A little tweak here and a little tweak there, and bingo - the value of the company goes up.  You can imagine that every single person in the room where the IPO pricing discussions were taking place had their spreadsheet open to see what their own shares would be worth with these little tweaks.  So, in the end, it's Microsoft's fault.

Fatesrider
Fatesrider

 Sorry, Corel has QuatroPro and LibreOffice has Calc (among others)...  Can't lay it all on Excel.  And none of them can tweak themselves.  Gotta lay it back on the tweakers...