Wall Street’s Egomania Killed Facebook’s IPO

Morgan Stanley might have been undone by Zuckerberg's hubris

By Tom Taulli, InvestorPlace Writer & IPO Playbook Editor


When it comes to cementing marquee deals, Wall Street bankers often let their egos get out of control. They slash fees. They filter out reality. In the end, the bankers regret even taking the deal.

No doubt, this has been the case with the Facebook (NASDAQ:FB) IPO.

In a public offering, the underwriter has many tough responsibilities. It must perform due diligence, organize the parties — such as attorneys and auditors — and advise the senior management team. The underwriter also will help draft the S-1, which must serve as a marketing document for the offering.

And concerning these tasks, Facebook’s underwriter, Morgan Stanley (NYSE:MS), did a standout job. For example, the S-1 had clean accounting — unlike Groupon’s (NASDAQ:GRPN) horrible mess — making it much easier to get approval from the Securities and Exchange Commission. MS also did an excellent job keeping the deal secret, and the road show went as smooth as Zuck would let it.

All in all, Morgan did everything right. So where did the process break down?

Simply put, it suffered a catastrophic failure in the final step: the pricing.

Again, this is not an easy thing to pull off. In today’s volatile markets, a hot deal can easily go cold — even a high-profile one like Facebook. This is why an underwriter will set a price range on an IPO, which provides some leeway.

Yet in the case of the Facebook deal, the price range was increased from $28-$35 to $34-$38, and the company upped the number of available shares by 85 million for a total of 421 million. For IPO investors, it seemed like a sure-fire indication that the deal was red-hot and that it would fetch a premium in the aftermarket.

But in light of the plunge in Facebook’s stock, could this have been merely a ploy to create the impression of demand? A way to generate even more buzz and excitement?

Maybe. But Morgan Stanley is too smart for that. The firm knows an oversupply of shares will crush the price.

Rather, I think the reason for the overpricing was the hubris of Facebook’s CEO and co-founder Mark Zuckerberg. Consider that he has consistently raised money at frothy valuations and somehow has been able to maintain absolute control. I would not be surprised if he also was extremely aggressive on the IPO valuation. Zuckerberg is the king of the Internet, right? So Facebook must be in the same league as other giants like Google (NASDAQ:GOOG).

Now, it looks like Facebook may have been experiencing a slowdown in its business during the last few weeks of its IPO (a report from Reuters speculates that an analyst cut the revenue forecast). If so, that further makes the case that this could be a result of Zuckerberg’s brazenness — a trait demonstrated a little while ago when he failed to notify his board or bankers that he was going to shell out $1 billion for Instagram.

In hindsight, the overpricing of the deal shouldn’t have shocked us. Rather, it was a foregone conclusion that Zuckerberg would move to overprice the deal, but Morgan Stanley took the risk anyway — and now the firm’s reputation has taken a considerable hit.

The bankers should have heeded an important rule: Many of your best deals are the ones you say “no” to.

Tom Taulli runs the InvestorPlace blog IPO Playbook, a site dedicated to the hottest news and rumors about initial public offerings. He also is the author of “The Complete M&A Handbook”, “All About Short Selling” and “All About Commodities.” Follow him on Twitter at @ttaulli or reach him via email. As of this writing, he did not own a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/ipo-playbook/wall-streets-egomania-killed-facebooks-ipo/.

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