It is three trading days after Facebook went public, and we now know that the IPO will live forever in the history books – just not in the way anyone had planned. Had Facebook openly set out to sabotage its own IPO, it could not have invented a better or more remarkable debacle: a tale of financial chaos fit for history books.
Facebook stock has lost 20% of its value in only three days. In that alone, it is not remarkable. Large IPOs rarely perform well just after going public. Fund manager Och-Ziff, for instance, fell 24% in its first week as a public company. (And thereafter: Och-Ziff went public in 2007 at $32 a share, and now trades at just over $7).
No, what makes Facebook stand out is that, at nearly every junction where wisdom, care and moderation ought to have intervened, they did not. In law enforcement, this is called a "smash and grab" – just knocking out the windows and taking everything in sight. On Wall Street, the disregard of the IPO for normal investors brought up a vulgar old traders' saying: "Pigs get slaughtered." Translation: greed gets punished.
As far as autopsies go, this is a complicated one, from the spiritual to the mechanical.
There was gracelessness: Mark Zuckerberg, Facebook's CEO, made it clear for months that he disdained the company's IPO, and deigned to show up to only one meeting with potential investors. That couldn't have done much to convince those investors to believe that Facebook took the Wall Street system seriously enough to give them a good return on their investment.
There was greed: executives and insiders made the IPO primarily a way to enrich their own fortunes – rather than the company's – and their stock dump accounted for 57% of the shares sold in the offering (reinforcing the old joke that "IPO" stands not for "initial public offering", but "insider profit opportunity"). To pour more money in the pockets of these insiders and the company coffers, Morgan Stanley, the lead underwriter, hiked the price the company was charging investors – $38 – and flooded the market with tens of millions of extra shares. (The investment bank then had to rush back into the market and buy millions of those shares to artificially support the price of the stock on the first day.)
Pricing an IPO correctly – to predict, in essence, its fair market price – is a delicate art, which is supposed to balance how much investors may like a company with how much they're willing to pay for it. For instance, you might buy your favorite cereal at $5 a box; but would you buy it at $20 a box? Probably not. You don't like the cereal any less; you just don't think it's worth that large a chunk of your budget for groceries. People love Apple enough to pay $400 a share for it. But if Apple were valued the same way as Facebook, each Apple share would be worth more than $3,000.
There was hubris: throughout the process, Facebook made it clear that the company believed it was different from other companies. It could straightfacedly value itself at $104bn even though it had just $3.7bn in revenues, for instance. It angled for the title of the "the People's IPO" and promised that one-fourth of the shares sold would go to regular mom-and-pop investors – even though the putative "people" would be buying overpriced shares from insiders eager to cash out. JP Morgan, one of the bank's underwriters, added to the hype by slapping Facebook logos all over its headquarters like a school girl doodling the class hunk's name into a notebook.