Facebook went public less than a week ago. But, not unexpectedly, a lot has happened in the few days since. As with many highly anticipated events (e.g., the Star Wars reboot and Barack Obama’s presidency) a lot of the reaction to Facebook’s IPO has been negative and filled with disappointment.
We’ve already got shareholder lawsuits against Facebook and the NASDAQ stock exchange, a privacy lawsuit settlement, and questions about how the IPO may have revealed broader problems about the way the system works. On the upside, the company’s GC, Ted Ullyot, has been making headlines in a more positive way, which is to say the dude is making mad bank for someone working in-house.
Let’s dig in….
The New York Times provides a good primer on the quick finish to the Facebook IPO honeymoon (to say nothing of how Mark Zuckerberg will be able to find time to take his own real honeymoon anytime soon). DealBook provides a play-by-play:
In the weeks leading up to Facebook’s I.P.O., Morgan Stanley took a frontal approach to the pricing process. When the firm considered raising the offering price as high as $38 a share and increasing its size, other bankers pushed back. They worried that the company’s growth prospects did not support such lofty valuations.
Some bankers were also troubled by the huge demand from individual investors, a relatively capricious group. While Facebook allocated most of its shares to big, institutional investors like mutual funds and hedge funds, it also gave a larger-than-usual block, close to 25 percent, to ordinary investors.
Around the same time, red flags emerged about the company’s growth prospects. On May 9, Facebook revealed in a regulatory filing some potential challenges to its growth. In particular, the company highlighted that users were increasingly using Facebook on mobile devices, but the company was not making much money on mobile ads.
To summarize, it seems the main issues were:
- Did Morgan Stanley adequately share relevant information about questions — specifically relating to Facebook’s mobile advertising — leading up to the IPO?
- A higher than average percentage of shares were given to normal people as opposed to institutional investors. This worried banks, because individuals tend to be “capricious” investors.
- The process of trying to set the initial stock price and figure out the correct supply and demand was fraught with problems.
At least two lawsuits have already been filed stemming from these issues. The first deals with the mobile advertising question. From the WSJ Law Blog:
Three Facebook investors have filed a civil lawsuit in Manhattan federal court, alleging the company and its underwriters failed to properly disclose changes to analysts’ forecasts made at the underwriting banks.
The suit follows news Tuesday that analysts at Morgan Stanley and Goldman Sachs Group cut their revenue forecasts on Facebook in the midst of the investor roadshow, a change that wasn’t widely disseminated.
Late Tuesday, Massachusetts sent a subpoena to Morgan Stanley following the reports. Several other plaintiffs’ lawyers have said they filed suits over the offering in other courts throughout the country, seeking class-action status.
Anyone who has used the Facebook iPhone app knows it has, to say the least, some functionality problems. I’ve had informal conversations with Facebook employees who are aware that there is significant work to be done. So it’s interesting to see how important the mobile angle is to Facebook’s future, not only on the user side, but also the revenue side.
Bloomberg reported last night on another lawsuit, this time filed against the NASDAQ stock exchange. It deals with practical trading problems during the initial public offering:
Phillip Goldberg, a Maryland investor, said in a complaint filed yesterday in Manhattan federal court that he tried to both order and cancel requests for Facebook shares through an online Charles Schwab Corp. (SCHW) account the morning after the May 17 IPO. He is seeking to represent a class of investors who lost money because their buy, sell or cancellation orders for Facebook stock weren’t properly processed, according to the filing.
“Orders placed by investors seeking to purchase Facebook shares during the first trading day often took hours to execute,” Goldberg said in the complaint. “In the meantime, the investors seeking to purchase those shares had no idea if their trades had executed, and, accordingly, had no idea if they owned Facebook shares at all.”
In addition to all these new lawsuits, Facebook also reached an undisclosed “settlement in principle” on Monday with users upset about allegedly appearing in sponsored ads without permission. Also from the WSJ Law Blog:
The lawsuit targets Facebook’s “Sponsored Story,” a type of ad that is created when a Facebook user “likes” a product or service. That endorsement is then visible to his or her friends.
The lawsuit alleges the Facebook ads violated the users’ statutory “right of publicity” under California law. The law protects against the non-consensual use of another’s likeness, voice, name for advertising or selling purposes.
The parties are supposed to report on their settlement progress at the end of the week. But hopefully Facebook can check that off its list soon.
I’m honestly not sure all this is as big a deal as it seems. As my colleagues might say, Facebook’s beef is in no way cooked. After being so, so hyped, there was no way Facebook could have entirely avoided a backlash to the IPO. (It’s probably only a matter of time until we see the backlash to the Facebook backlash, but let’s not get ahead of ourselves.)
Either way, there is at least some upbeat news coming out of this IPO tornado — an indication that in-house counsel CAN still make the big bucks….