Facebook would be the poster child for how not to do a public offering,
except for the fact that Zynga holds that title:
So what went wrong, what are the consequences, and what to do in the future?
Hubris
With regard to Facebook and Zynga, much of the mis-perception on the part of the company comes from their buying their own story (notice I didn't say bullshit).
They believed that their tree would grow to the moon. Sorry, we are in a very competitive economy and everything regresses to the mean.
Pendulum Theory
In fact, we have "Pendulum Theory (TM)." Pendulum theory says that when you pull the pendulum further out in one direction, the more it swings back in the other.
The issue price on these IPOs was very high, and now the market price has swung very low. They are now what I call Fallen Angels.
Leaving Something on the Table
These companies tried to maximize their cash intake in their initial public offering. The tradition on Wall Street has been to leave some money on the table for the buyers so that the stock will trade at a reasonable premium. They did not do that, they greedily soaked up all the demand at a price that was pushed to the limit. Facebook actually increased the offering amount of shares at the last minute to soak up all the money on the table.
The idea of a smart underwriter is to leave buying out there to soak up the flippers and shorts and still have some demand for the deal in the aftermarket. This ensures a premium and you can call the deal a success if it holds its own for a few months.
Instead, all the demand was taken by the company, making the stock vulnerable and causing the shorts to celebrate.
Disclosure
We read now that Facebook was trying to polish its disclosure. I believe that in the offering document you tell it as ugly as you can. The purpose of the prospectus is to protect the company, not the investor. You also protect the investor by telling the harsh truth, and by putting the worst face up front, you protect the company. By hiding things, you can get into big trouble. They failed to appreciate that these deals were so hot they could have been very pessimistic and they still would have sold out.
Consequences
The consequences of this rape of the IPO buyer strategy are now evident.
We see lawsuits. Nobody sues if the stock is up or at least near the issue price. But everyone assumes fraud is the price is way down.
We see employees leaving, demoralized by the decline in the value of their incentive stock and options.
We see burned institutional buyers that will be happy to tell the company and the underwriters what to do with their next stock offering -- something involving rolling the stock certificates into a conical shape and storing them elsewhere.
We see management having to defend, defend, defend and that is not good for morale or company expansion.
Was it worth it, guys?
What to Do Now
The company has to eat crow and mend fences. Buying up that low priced stock with all the cash they got would not hurt.
The underwriters have to wait for the institutions to forget and try to make it up somehow.
The IPO buyers have to look out for companies that put themselves first. The shorts will be watching for those also.
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