Rathbun: Facebook: An illustrative look at IPOsWritten by Gary Rathbun | | GaryRathbun@PrivateWealthConsultants.com
I am so glad that the Facebook initial public offering (IPO) is complete. I was never a big fan of this offering and was able to talk most of my clients out of purchasing the stock on May 18. Now we can sit back and let the finger pointing, Monday morning quarterbacking, rationalizations and lawsuits begin.
First, let’s look at how the IPO was put together and some of the warning signs that caused me to lack excitement about getting in. One of the early warning signs for me was all of the hype that the investment banks and the media were putting out. You have to remember that this is a company that really doesn’t produce anything. It mines data for advertisers. But as General Motors stated a couple of days before the IPO, the advertising dollars being spent were ineffective in selling cars.
I know that I am part of a generation that doesn’t use Facebook personally so I don’t see the need or usefulness of the site but I still think it is important to create a product that investors understand.
Another warning sign was the fact that Facebook has only made a profit in the past couple of years. There is no real long-term track record of sustainable revenue and profits.
One of the other big points was increasing the amount of shares offered in the IPO. The number of shares was increased by 25 percent in the last week before going public. Simple reasoning would suggest that the price be adjusted lower to compensate for the “inflated” number of shares but instead Morgan Stanley raised the price to around $38.
Both of these actions were based on the response to all of the hype in the marketplace. Morgan Stanley stated that the demand was very strong and that it would not be a problem selling the additional shares even at the higher price. In fairness, it wasn’t much of a problem selling the additional shares on the first day; on the second day, however, the story was a little different.
I am not going to get into all of the accusations about insider information, inappropriate short selling, Chinese walls and Morgan Stanley buying shares to support the price. Already, lawsuits are being filed and it will be interesting to see what information comes to light and what the court rules. I will comment on those events as they unfold, either here or on my website. Suffice it to say that we will be looking at this offering for many months and it will definitely affect the next social media IPO that decides to go public.
Finally, the saying, “buyer beware” still comes to mind. One can make an argument that false information may have been put out, but why would you not question the information when the source is the company that will benefit from selling you the stock? You should always question the information as well as the source.
A couple of columns ago we talked about an adviser working from a fiduciary standard on your behalf and this is a classic example. I advised my clients to avoid Facebook because of the research my company did and the sources I used to get reliable data.
If your adviser makes money on the transaction, you need to ask yourself the fiduciary question. Is he/she acting in my best interest or is he/she recommending this because they make money?
Gary L. Rathbun is the president and CEO of Private Wealth Consultants, LTD. He can be heard on WSPD 13670 AM every day at 4:06 p.m. on “After the Bell” with Brian Wilson and the Afternoon Drive, and every Wednesday and Thursday at 6 p.m. throughout Northern Ohio on “Eye on Your Money.” He can be reached at (419) 842-0334 or email him at email@example.com.