Wall Street faces a fiasco over Facebook float

Wall Street faces a fiasco over Facebook float

By Alex Brummer

PUBLISHED: 16:03 EST, 23 May 2012 | UPDATED: 16:03 EST, 23 May 2012

Trouble ahead: The initial public offering was the biggest in Wall Street's history

One of the key principles behind public markets is that all investors should be treated equally whether they are big battalion investors, hedge funds or ordinary Sids or Sadies queuing for the shares at the main street branch of Merrill Lynch.

It was breaches of this principle which led to Chinese walls being built between the corporate finance teams at investment banks and the analysts after a huge scandal in the mid-2000s. Moreover, secret briefings for hedge funds and friends was one of the key features of the Raj Rajaratnam insider trading show trial last year.

Given this sensitive background, one might have expected Morgan Stanley, JP Morgan and Goldman Sachs, the lead underwriters of Facebook, to have been ultra-careful when offering shares to the public.

Not only was the initial public offering the biggest in Wall Street’s history, it also attracted large private investor and consumer interest because of the social media phenomenon.

So it is shocking to learn that analysts at Morgan Stanley and several other underwriters allegedly altered forecasts for Facebook’s second quarter earnings because of disappointing mobile revenues. But the information was only passed on to selective institutional clients.

What made matters even worse is that they allowed the flotation to become a circus replete with electronic bell ringing connections from California to Nasdaq, whooping Facebook employees and Mark Zuckerberg pictured among his hoodie friends.

Zuckerberg had already alienated some investors with his insistence on maintaining tight control on the company by keeping hold of most of the voting shares, effectively disenfranchising many of the investors.

The advance knowledge that revenues might not meet expectations in the second quarter of any one year may be unimportant in of itself given the dominance of Facebook in social media, and the likelihood that Zuckerberg and his associates are smart enough to eventually crack the cell phone market.

Nevertheless, the combination of a flawed IPO together with the market’s view that the shares have been grossly overpriced leaves an extraordinary bad taste and raises questions about valuations right across the digital space.

One might have hoped that a blue chip house like Morgan Stanley would have been scrupulous in ensuring fair play. Indeed, had the Facebook stock not bombed â€" it is down 20 per cent on the offer price â€" no one might have paid much attention.

The reality is that investors have lost confidence. They fret about future advertising revenues, the company’s governance and whether Facebook, despite its customer base, could be the next MySpace or Napster. All of which suggests that a misjudgement was made on the offer price. No wonder the American securities regulators are crawling all over it.

Losing control

It might have been thought by now that Europe’s leaders might have learnt that the fate of the euro matters not just to the politicians in Berlin and Paris but to every saver and investor in the world. But the message never seems to get through.

They are playing with fire. The suggestion by t he former prime minister Lucas Papademos that Greece faces a stark choice in the June elections between austerity and exit has frightened the kittens.

Germany has added to the woe by again setting its face against eurobonds despite the fact that the International Monetary Fund, among others, believes that this is one of the best ways of Northern Europe sharing the pain with its less well off Southern neighbours.

The result of this dangerous game is horribly predictable. Shares in London dived 2.53 per cent with similar falls across the eurozone, the euro fell to a two-year low against the American dollar and oil prices dived. The latter may seem like a good thing but reflects fears that Europe might drive the world back into recession. It is extraordinary that after 18 euro summits, countless G8s and G20s and dozens of other meetings, Europe is still in chaos about how to handle the markets.

The lesson is listen and make firm decisions or otherwise face many more years of economic dislocation.

Online short cut

One of the great mysteries of our time is that Ocado, which produced some encouraging sales figures for the latest quarter, has not been snaffled by another retailer. Several of the big players including Marks Spencer, J Sainsbury and Wm Morrison have been woefully slow in developing online businesses.

In Ocado there is a ready-made platform and as recently as late last year the shares were trading at just 50p or so. Ocado’s ten-year supply deal with Waitrose did not have to be a blocker. Now that it has mastered the robotic technology to go with its whizz bang easy-to-use website, it is a formidable player.

Opportunity still knocks.

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