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.

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