One of the things that happens when an initial public offering goes bad — that is, when a stock fails to go up after its IPO — is everyone starts looking for a scapegoat. We’ve seen people argue that Mark Zuckerberg is to blame for Facebook’s poor performance, because he is “in over his hoodie” and doesn’t have an effective vision for the company, but now Andrew Ross Sorkin at the New York Times has nominated a new goat: chief financial officer David Ebersman, who was in charge of the rocket-powered IPO that turned into a damp squib. But is it really the Facebook executive’s fault that demand for the issue evaporated and the share price has gone downwards ever since? Hardly.
Sorkin tries hard to make his case in a post at the NYT’s DealBook blog, arguing that the Facebook CFO was the chief architect of the social network’s gigantic public offering — which was supposed to value the company at upwards of $100 billion — and that since he was brought in specifically for his experience with the public markets, he deserves the blame for the failure of the issue. Even more than that, Sorkin argues that Ebersman effectively needs to shoulder the responsibility for the continued slide the shares have been on ever since, a drop that has cut about 50 percent from the company’s market value.
A train-wreck IPO requires multiple players
The NYT columnist says that Ebersman mis-priced the offering, overestimated the amount of demand, flooded the market with extra shares at the worst possible time and since then has remained mum about how exactly he is going to fix things. At one point, Sorkin even seems to be suggesting that Ebersman should be fired for his behavior both during and after the company’s IPO, saying:
“If there is one single individual more responsible than any other for the staggering mispricing of Facebook’s I.P.O., it is Mr. Ebersman… it is remarkable that nobody — no bankers, no one at Nasdaq, no one at Facebook — has been fired for botching the offering.”
Sorkin is right about one thing: there is no question that Facebook’s IPO was a pretty high-profile train wreck in a lot of ways, a pale shadow of the superstar offering that everyone expected — or at least hoped for. Instead of rejuvenating the market for technology issues, it effectively slammed the window shut, at least for social-web IPOs (although lackluster offerings from companies like Zynga have also helped to close that window). But was that Ebersman’s fault alone? It’s difficult to see how.
It’s true that Ebersman, as the man in charge of the public issue, has to wear some of the blame for what transpired. But if the IPO was a train wreck — and there’s at least an argument to be made that it hasn’t been for Facebook itself, even if it has been for retail investors or the brokerage firms who underwrote it — then there are plenty of others who deserve some of the blame as well.
To take just one example, the Nasdaq stock market bungled the offering in a fairly spectacular fashion, as many observers have noted: it handed over one of the most high-profile issues in recent memory to a new trading system that almost completely failed to match buy and sell orders properly, creating the stock-market equivalent of a 100-car pileup that took hours (possibly even days) to clear. For any stock issuer, the signals that come from the market are a crucial indicator of demand, and the Nasdaq’s failure meant that those signals were almost completely unreadable.
Was the IPO really a failure? Not for Facebook
But more than that, the biggest culprit when it comes to the IPO’s lackluster debut — and the continued slide the shares have been under since — is the overheated hopes and dreams of the market itself leading up to the issue, compounded by the greed of the company’s financial backers, venture investors and brokerage advisors. Should Ebersman have known that demand was being overstated? Perhaps. But when the world’s largest underwriters and market experts are telling you to increase the float, do you tell them they are wrong, or do you take the advice that you are paying them hundreds of millions of dollars for?
David Ebersman may have miscalculated, but he is hardly the first CFO of a newly public company to do so, and the reality is that he was given plenty of assistance in that department. And as for not articulating how he plans to get the stock price back to where it should be — something Sorkin also castigates him for — how exactly is he supposed to do that if the price was over-inflated to begin with?
Regardless of whether Facebook managed to meet the sky-high expectations of insiders or those who bought shares in advance of the IPO, or even of retail investors who got caught up in the hype, there is an argument to be made that the company has made out pretty well from the issue, as billionaire entrepreneur Mark Cuban notes in a blog post. Facebook got $10 billion to fund the company’s growth — and it was abundantly clear from the company’s prospectus that CEO and controlling shareholder Mark Zuckerberg (for better or worse) has no intention of listening to the moaning of short-term investors.
The reality is that everyone over-estimated the demand for Facebook shares, not just David Ebersman. And everyone seems to have assumed that the euphoria about the company’s rosy future would carry the stock to unimaginable heights following the issue. The fact that much of this was based on wishful thinking and a wilful misreading of the company’s financial situation is hardly David Ebersman’s fault.