Top 10 Reasons Why Facebook's IPO Went Badly

05/31/2012 12:12 pm ET | Updated Jul 31, 2012

10. It came to market too late to begin with! The last private equity round Facebook raised valued the company at about $50 billion. And the current market is taking the public shares back toward that level, which is 50 percent below the initial IPO pricing.

9. Bad news travels fast, but not far. The bad news about Facebook's declining earnings profile, traced to the fairly recent shift of more users to mobile access, which is less conducive to Facebook's advertising revenue. By the way, this transition had not yet become significant at the time of Facebook's last private equity round.

8. Large brand ad pulls.
General Motors' decision to pull its Facebook advertising (but, notably, not its Facebook page) because GM is said to have judged those ads ineffective in driving car sales. This conclusion is particularly suspect, however, because the main complaint in integrated marketing circles about social media ad campaigns in general is that the tools for measuring their effectiveness are at a very primitive stage. Any judgment regarding effectiveness is currently based on pretty flimsy evidence either way.

7. Downtrends and downdrafts. Morgan Stanley's and other underwriters' stock analysts expanded upon Facebook's own public announcement of a downtrend in earnings trend per #9 above by telling institutional clients that they were lowering their unpublished earnings estimates for Facebook in the quarters ahead. This created a downdraft in previously indicated institutional pre-IPO "buy on open" order that retail investors were unaware of. It is probable that the actions of these analysts were within the letter of the law, but will lead to calls for reform in the IPO regulatory structure that actually forbids analysts from publishing such conclusions before and for several weeks after their firms underwrite an IPO. But it does allow them to have private conversations with institutional customers that disclose such changes of opinion. As Shakespeare knew, the law can sometimes be an ass.

6. No good deed goes unpunished. Facebook's own pre-announcement that a mismatch was developing between its subscriber base and its most effective advertising platforms: honest, yes, but no good deed goes unpunished. This was the equivalent of an already-public company giving very conservative 'forward earnings guidance" when it announces quarterly earnings -- even if the actual reported quarterly earning "beat the Street" estimate. Negative guidance very frequently brings the stock price down hard.

5. Greedy secrets, perhaps? In the face of negative news and predictably shrinking institutional buying appetite, Facebook and Morgan Stanley agreed to up the projected offering price range and expand the number of shares on offer: Hello? Were they listening to their own stock analysts and sales forces? Or, were they just getting greedy knowing that retail investors did not know what they knew?

4. Greed plus hubris equals disaster. On top of that, they allowed a raft of insiders to sell their shares as part of the IPO. Usually most all insiders wait until the first "follow-on" offering post-IPO -- a long standing tradition to protect the success of IPO's lest they be seen just as a chance for insiders to unload their shares. Facebook and Morgan Stanley doubled-down against this tradition.

3. Push Wall Street, it may push back. Facebook and Morgan Stanley structured the public shares as having essentially no voting power to effect management; Mark Zuckerberg's leading but minority shareholdings as a result leave him in majority control of the company. Much like Rupert Murdoch's control of News Corp. Fully disclosed, nothing illegal, but why emulate Murdoch and expect major potential shareholders like CalPERS to willingly go along. Sticking your finger in Wall Street's eye is not a gesture of respect.

2. Boy in the hood. The hoodie incident at Facebook's first "roadshow" with investors in New York. Trying to look like you're being like Steve Jobs in terms of haberdashery before you've proven to public shareholders that you are Steve Jobs in terms of performance is just a bit forward. It was predictably perceived as a send-up to the folks in suits (men and women) who actually buy shares that give Facebook the means to not care about profits but only about making us a more connected universe. ALL successful businesses start by meeting an unmet consumer need -- Facebook is not holier than thou, it just seems to think it invented customer-focused strategy -- like those who view "network effects" as something invented by some brilliant 20-somethings in the 21st century, forgetting for example three centuries of history of businesses like stock exchanges!

1. NASDAQ strikes out with the bases loaded. NASDAQ's unforgivable incompetence in not stress-testing in advance its confirmation delivery systems in the face of projected demand, and then going forward with trading when they knew the system wasn't working well at all. This disaster led to a "no confidence" vote by first-day traders in the truth of moment-to-moment pricing, which is the world's loudest "sell signal."

All this being said, a lot of nonsense is being said about Facebook by today's market commentators -- some downplay or even deny that the company makes any money -- this is not dot-com time -- Facebook does have earnings, $4 billion annually at last count. It does have customers, 900 million at last count. It does know what a smart phone is.

Rest assured, there is a lot of smart money out there that is delighted that Facebook is off to such a rocky public-company start -- because they know in a few days or weeks, they can pick up a stock in the 20's that will most likely be worth a lot more than that in a couple of years: see the history of Microsoft, Google, Amazon, Apple, etc. Welcome back from your honeymoon, Mark!