Where did it go wrong for Facebook?

David Hellier, deputy editor at City AM, says it is too soon to know where this will all end up but the Facebook experience has re-opened the debate about dot com bubbles and has cast a shadow on New York’s unchallenged right to host technology flotations…

In New York last week they called it being Zucked. Too many investors were left with a bad taste in their mouths and reduced values in their portfolios following the internet group Facebook’s historic $104 billion flotation.

Overpriced flotations, or public offerings of shares, have a habit of living long in the memory. Those in the business of new issues in the City of London remember only too well the recent floats that have disappointed; the internet grocer Ocado, the retailers Sports Direct and Debenhams to name but three.

Even a year after the event, large overpriced issues are trotted out by market participants as reasons why a new issues market, such as the London one at present, isn’t functioning.

But how did it go wrong for Facebook?

In theory the flotation was handled by the bank best-suited to leading on such a large flotation, Morgan Stanley. Its team, led by star banker Michael Grimes, had beaten off competition from Goldman Sachs, JP Morgan and others, and had done so largely by virtue of its experience in the sector having floated the likes of Groupon and LinkedIn.

Rival bankers, though, say that Morgan Stanley’s determination to make the most of the major decisions on its own cost it dearly when the time came to assess events in the light of changing circumstances.

At first, staging a flotation at all seemed a touch optimistic as the world’s financial markets experienced a renewed bout of euronerves. Then, when the decision was taken to proceed as planned, sentiment was knocked by two bits of adverse news. First GM revealed that it was no longer going to advertise on Facebook because it felt its ads were not so effective there; then the company itself revealed that it was not taking as much advertising on mobile appliances as it did on home or office computers.

Despite these two bits of bad news, Morgan Stanley determined to increase the price range of the float and expand the number of new shares that would be issued. Both these moves would have been a gamble in normal times but against the macro background and in the context of the two bits of bad news, the decision looks suicidal.

Speaking to bankers last week, they said that Morgan Stanley’s biggest fault was not listening to other members of the consortium. “It was as if they were saying, look guys we’re leading on this, we’re sector experts, don’t try to tell us what to do.”

Furthermore, bankers said, Morgan Stanley was mindful that when it floated LinkedIn, the group’s shares rose 50% shortly after the issue, leading to suggestions that it had been wildly underpriced. No client likes that, and no doubt Facebook made its views known to its adviser in no uncertain terms.

So we end up with a situation where a company with revenues of just $3.7 billion ends up being floated with a valuation of $104 billion and unsurprisingly the market does not hold that value in the days following the float.

It is too soon to know where this will all end up but the experience has re-opened the debate about dot com bubbles, it has cast a shadow on New York’s unchallenged right to host technology flotations – supposedly it is the centre that knows most about such things – and it has clarified in my mind at least that no matter how much of a star banker you are, it is always wise to listen to what others in your syndicate are saying, even if they do work for your bitter rivals.