Streetwise Professor

May 25, 2012

Social Network-The Sequel

Filed under: Economics — The Professor @ 7:32 pm

In the aftermath of its botched IPO, Facebook may need to change its name to Fiasco Book. The recriminations are flying fast and furious, and and are likely to only intensify.

The basic facts are that right in the middle of the roadshow, Facebook realized that its earnings prospects were weaker than anticipated.  It released a revised S-1 disclosure that made a Delphic reference about the fact that its “daily active users” were growing faster than “ad impressions.”  It also told the underwriters that earnings would be at the low end of the range as a result of this poor performance.  Underwriters communicated this information to big institutional clients.  They issued no written report to the broader market, and Facebook did not make any disclosures beyond that Delphic statement.  Moreover, Facebook insiders decided to issue 25 percent more shares, and price the issue very successfully.

And the rest is history; the fingerpointing is the future.

The primary target of criticism has been Morgan Stanley, the lead underwriter.  Leading the brigade of critics is Henry Blodget, of Business Insider.

Blodget initially suggested that Morgan Stanley might have broken the law by telling only some of its clients.  He has since walked that back completely, and now focuses on the unfairness of it all.  Moreover, Blodget gives Facebook executives, notably its CFO David Ebersman, a pass, and places the blame entirely on Morgan Stanley and the other underwriters.

You may remember Blodget.  He was a famous-then infamous-Merrill Lynch analyst during the tech boom, whose work earned him a lifetime ban from the securities industry.  (More on this below.  Complete with personal color.)

So why didn’t MS issue written reports available to all investors? Because they can’t-by law-between the release of the S-1 and 40 days following the IPO.

And why, pray tell, is this true?  Because of the shenanigans that went on during the dot com boom:

The bizarre rules are a result of previous regulation, created a decade ago, after abuses made by investment bankers in written reports during the dot com era. These rules may need to be reformed, but Facebook needs to play by them for the time being.

And who is the poster child for the abuses made by investment bankers in their written reports during the dot com era? Well, one Henry Blodget.

So it is way beyond rich for Blodget to rail against the unfairness of rules that he played no small role in bringing about.  And I am at a loss for words when figuring out how to describe the chutzpah he displays by fulminating about inadequate disclosure when he fails to disclose his role in the events that led to the rules that limited what Morgan Stanley could tell the world.

His defenders claim that Blodget is reformed.  Color me skeptical.

Why? I’ve seen him, up close and in person.

I was an expert witness against him in an arbitration related to his work at Merrill.  I had the, umm, experience (adjectives escape me) of watching him testify for the first-but not the last time-in a legal action related to his behavior.  And what an educational experience it was, watching him attempt to explain how he could rave in written analyst reports about the prospects of one of the companies he followed at the same time he was referring to the same company as a “POS” in emails.  He attempted to feign that he didn’t know exactly what “POS” meant.

Uh huh.  Tell me another one.

I saw a total weasel trying to dig his way out of a mountain of lies.  So you’ll understand if I don’t trust him as far as I can throw him.

Especially since he made allegations of illegality-and then backed off, and then denied (on Twitter) that he had and claimed that I had been unspecific in my criticism.  Since he changed the subject after I replied (quoting him): “‘Selective dissemination of this sort could be a direct violation of securities laws.’Specific enuf?” Since he whined about “unfairness” and being “bashed” in response to criticism.  Boo hoo hoo.

And especially since he is flacking for Facebook, Zuckerberg, and Ebersman, and placing all the blame on Morgan Stanley. No doubt since he is persona non grata on Wall Street, he is trying to suck up to Silicon Valley and the social media VCs who are desperate to avoid the negative fallout from Fiasco Book.

I’m not buying. Facebook chose to make the Delphic disclosure.  Facebook chose not to modify its S-1 to disclose the bad earnings forecast news.  Facebook insiders chose to unload more stock.  Yes, Morgan Stanley went along with this, but (a) ultimately, the information was Facebook’s and it chose not to disclose, and it chose the size and price of the deal, and (b) it is pretty clear that Facebook was throwing its weight around (as evidenced by the fact that Morgan Stanley’s CEO participated in some of the discussions).

This will all be litigated, of course.  No doubt MS will not escape unscathed.  But my prediction is that Facebook-and Zuckerberg-will take the big hit.

Apparently Zuckerberg learned nothing from the Saverin litigation.  He tried to take everything then, and leave nothing on the table.  It appears to me he tried to do the exact same thing in the IPO-in the way that he retained control of the company, and in the way the deal was priced and sized.  He made one enemy the first time around.  This time around-thousands.

So inquiring minds want to know: will Jesse Eisenberg play Zuckerberg in Social Network II?

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  1. Farcebook.

    Comment by FredB — May 25, 2012 @ 8:49 pm

  2. I think everyone lazy person got what he/she deserved – to do it the easy way and do it big…

    There is an instructive wisdom in this failure. I can compare it with every next kid’s dream in the African-American community – to become the next Michael Jordan or Jey-Z. Every high-school student is now thinking that he/she will write such an incredible website and he/she will make so much money, that he doesn’t need to do anything else – all he/she needs to do is to come up with some incredible and simple idea.

    Comment by MJ — May 25, 2012 @ 11:36 pm

  3. “every lazy person” 😉

    Comment by MJ — May 26, 2012 @ 2:48 am

  4. There’s a Harvard Business School case on the AOL Time-Warner merger. It’s worth reading to see how Blodget values the deal. I don’t think it matters TOO much whether he was incompetent or dishonest (both?). He was calling the merger a buy from the about $75 to about $18.

    Comment by David Hoopes — May 29, 2012 @ 8:19 pm

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