Facebook debacle may have screwed the pooch for good
By Paul Mackintosh - 08/06/12
Here’s a 30-second concept pitch for a Hollywood producer: how about The Social Network II, where the Mark Zuckerberg character becomes a Gordon Gekko-style shark who bilks poor retail investors with the connivance of evil Morgan Stanley? The Facebook movie at least opened to better reviews than its original’s IPO, and still ranks high on Rotten Tomatoes – which seem to have been flung at every party to the listing by now. Morgan Stanley CEO James Gorman is now rivalling Gekko as poster boy for Wall Street arrogance with his characterisation of Facebook retail investors – 26% of the float – as “naïve”: hard to justify when reports of Facebook adding E-trade to the underwriter line-up to capture retail punter demand surfaced just one day before the selective leak of amended IPO filing data to institutions.
Facebook is now down by 32% since the IPO, from US$38 billion to $25.75 billion, shedding $33.25 billion of market cap. And now we have Eric Jackson, founder of event-driven hedge fund Ironfire Capital, forecasting in Forbes that Facebook will “disappear” in five to eight years. Admittedly, what he meant by disappear was that the company’s revenue will shrink to a Yahoo level, to just 10% of the IPO value, rather than vanish completely – but Yahoo at least didn’t see this happen just one month after its IPO. And this for a stock valued at 100x PE? What kind of growth could have justified that valuation in the first place? Where is Facebook going to find another 99x900 million members?
All the precedents were there though. Yahoo went IPO in 1996 at $24.50 per share and rose to $43 during its first trading day. By January 3, 2000, it was at its all-time high, $118.75. But by September 26, 2001 it was down at its all-time low of $4.05. That is value destruction on an epic scale. But Facebook had nothing like the bursting of the tech bubble to excuse its slide.
Unfortunately, the whole sorry greedfest may have consequences. The Facebook debacle may just have screwed the pooch for good. Enough pundits are already proclaiming that the IPO model, and even the publicly traded company, are no longer viable. This sorry outcome could permanently damage a VC culture already in retreat. Even institutional insiders have reason to be disappointed at the performance of any Facebook shares they’ve been left holding. Not to mention that Morgan Stanley has handed politicians a perfect stick to beat Wall Street with in an election year. Let the class-action lawsuits roll.