Facebook fiasco may close tech IPO door

Market sours after long recovery from dot-com mess.

By MSN Money Partner May 24, 2012 1:07PM

By Therese Poletti

 

MarketWatchThe recent comeback of the tech IPO is over.

 

Gone, up in smoke, after the debacle that was the highly-anticipated-but-ultimately-botched $16-billion debut of Facebook (FB)

 

As more gory details and a parade of lawsuits materialize, it is clear that the whole fiasco will likely further discourage investors -- even those big institutions accustomed to risk -- from participating in initial public offerings, especially tech deals.

 

"I think it will freeze the IPO market until there is some stability and some answers as to what went wrong with Facebook," said Scott Sweet, senior managing partner of the IPO Boutique. "IPOs, as you know, are inherently risky by nature, and here we had the 'found money' blow up."

 

Questions have arisen regarding both the market's ability to manage popular deals as well as questionable behavior by investment banks, which seem to have found a way to keep giving their select clients the juiciest information.

 

Facebook was one of the most anticipated initial public offerings in years. But despite reams of breathless coverage speculating on how high the shares would go, the balloon quickly popped on the deal, sending the shares down more than 18% in their first three trading sessions.

 

Despite closing Wednesday up about 3% at $32 -- Facebook shares remain 15% below their IPO price of $38.

 

More unsavory details are emerging daily on the Facebook flop. On Tuesday, Reuters reported that in the days before the IPO, the Internet analyst at Morgan Stanley (MS), Facebook's lead underwriter, cut revenue forecasts for the social network, which the firm reportedly shared with some of its major clients.

 

The IPO process, even in the era of so-called "Reg FD" (regulation full disclosure) now seems broken. In August 2000 -- after the dot-com bubble burst -- the SEC adopted Regulation FD to improve the previously selective disclosure of material non-public information. In general, the gist of the regulation states that when a company or anyone acting on its behalf discloses material information to any market professionals, it must make that data public.

 

Morgan Stanley says it followed the same procedures for Facebook that it follows for all IPOs and it was in "compliance with all applicable regulations." But, looked at another way, that statement could suggest that its practice of withholding key financial analysis should be a red flag for any investors who are not deemed major clients by the firm.

 

"The retail investor is being viewed as the ultimate fool and left in the dark while a few people are being given insider and private information," said Sam Hamadeh, chief executive of PrivCo, which analyzes private companies.

 

The Nasdaq (NDAQ)  is also under scrutiny for trading problems that occurred last Friday, with many traders claiming that their orders were never processed, leaving them holding big losses as the stock tanked. Others have claimed they ended up paying higher prices for Facebook shares than they believed they were paying. Regulators have vowed to look at the deal. Lawsuits seeking class action status are being filed.

 

Above all, the hopes that a strong reception for the popular Facebook offering would also boost other tech IPOs now seems to have faded.

 

Already, on Wednesday, Tria Beauty which develops and sells handheld laser devices to consumers for at-home hair removal, postponed its $64 million IPO, citing poor market conditions.

 

One tech company that investors have been hoping would go public possibly this fall is Workday, which is developing human resource software in the cloud, and started by PeopleSoft founder David Duffield. Workday did not immediately respond to a request for comment on the status of its potential IPO. Earlier this month, All Things D reported that Workday hired four investment banks, led by Morgan Stanley, for an IPO that could debut sometime in the autumn.

 

It has taken a few years for U.S. technology companies to find the public markets open to IPOs again, after the dot-com bust and tougher legislation lead to a major IPO drought where only a few tech firms managed to go public. Venture capitalists complained of having to continue to fund late-stage tech companies, and many companies decided to go to the merger route instead.

 

"We are just getting started. It just smells rotten," said Hamadeh, referring to the bad news that keeps coming out.

 

He added that he was worried about the other companies that have been looking at going public after Facebook. "What's going to happen to the IPO window to have it come out like this?"

 

More from MarketWatch

 

 

3Comments
May 28, 2012 8:50AM
avatar
The retail investor IS the ultimate fool.
May 29, 2012 7:49PM
avatar

I agree with the first poster. Once the retail investors, found out that Morgan Stanley, gave its top customers inside information about facebook, that soured the retail investors, from buying shares.

Probably one of the main reasons the stock took a tumble today.

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