Do forgive the overwrought headline - this is more or less an accurate representation of some of the more ludicrous reactions to Facebook’s share collapse since its IPO a couple of weeks ago. As I write the price was just over $25 per share, you might recall it floated at £38. That’s fractionally a third wiped off the value of any investment on day one.
So the coverage has been hostile, shareholders are suing en masse, Nasdaq is talking about compensating them and there have been headlines asking whether the shareholders themselves can bring the company down. The answer to that one can be dealt with quickly: no. CEO Mark Zuckerberg ensured that they bought non-voting shares so even if every single person buying shares on day one voted for his sacking, they can’t touch him directly.
Let’s also be a little non-PC and say that America is noted for being a bit litigious. People sue, and often – and they have a thing called “class action”, which is when a group of people who share a grievance in common take action jointly. Sometimes one individual gets them together – so we don’t know how many people are really suing Facebook because their gamble (did I mention buying shares is a gamble? Never, ever think of it as anything else) didn’t pay off. That said, 13 groups of people are currently involved in litigation with the company over its Wall Street launch.
It’s useful to look at the Facebook IPO – initial public offering, flotation as we’d call it over here – beyond the sensationalist stuff. Anyone starting up a business can learn from it. Starting on 18 May at $38 a share and sinking to just over $25 in less than three weeks is poor by anybody’s measure.
The first thing to ensure is that your valuation is realistic in the first place. Loads of merchant bankers and others, used to getting very rich very quickly, will tell you your business is worth more than it is. Sometimes they’re right: Facebook’s profit is around $3bn and the standard way to value a business is to multiply that by three. In FB’s case you can probably add a fair bit because of the potential for moving into e-commerce with Facebook transactions, more adverts and selling people’s information with their approval. But the initial valuation, based on $38 per share, put the company at $100bn – see the increase-by-a-factor-of-ten they did there? My instinct is that the market will continue to correct this figure downward for a little while longer.
The second would be to ensure that there is absolutely no question of an announcement about less-than-expected profit during trading due to emerge at around the time of the flotation. One of the things shareholders are saying about Facebook (for example David Goldberg, Kevin Hyms and Garrett Garrison, who launched a class action on 4 June) is that the executives had access to information that suggested the company was overpriced before the launch. Facebook is of course denying that the lawsuits have any merit and until there’s a result it would be wrong to speculate.
The third – and this may or may not be possible, I’m not familiar enough with American trading laws to be sure – is to try and incentivize your underwriting bank in some way. When it gets out, as it has, that your ordinary shareholders have lost a third of their money while your bank has earned a $100m profit, you might just find the Christmas Cards stop rolling in.
The last thing to do is to make sure you don’t halt trading on day one because of a technical glitch. I have no idea how you make this happen – but if that had been the only issue facing the Facebook IPO then I’d guess the shareholders would have been a lot happier by now.
So no, the Facebook shareholders can’t short circuit or otherwise kill the company in spite of what some overheated headline writers will tell you. The company’s reputation, however, has taken something of a battering from which it will take a while to recover. Given that its business is in building digital reputations, you might consider that a bit ironic.