What a deal!
Here’s all you need to know about the Facebook IPO in short simple terms that anyone can understand.
At the last moment of its IPO, greedy Facebook said the number of shares for sale would be increased to 421 million, 25% more than it had previously planned to offer.
Few investors knew that the bulk of the shares were being sold by Zuckerberg and friends—and that far fewer shares were being sold to finance Facebook.
Zuckerberg and friends raked in $9.2 billion while Facebook received “only” $6.8 billion.
The investors were paying off Facebook insiders far more than they were investing in Facebook.
Of the $38 per share price that the investors were coughing up, only $16.24 was going to Facebook, while a whopping $21.76 was going into the pockets of Zuckerberg and friends.
Bad? It gets worse.
The investors were buying Facebook “Class A” shares which have very little voting power—almost none.
After the IPO, Zuckerberg and friends still hold an incredible 1,780,535,644 shares of Class B common stock. These Class B shares are valued at $66.7 billion as they are convertible into Class A shares.
Here’s the kicker: The Facebook prospectus states, “Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes.”
Doing the math we see that the investors Class A shares lumped together have only 4.1% of the votes while the Class B shares belonging to Zuckerberg and friends have a whopping 95.9% of the votes.
The Facebook investors will have absolutely no say in the running of Facebook.
Stockholder meetings will be a joke—if they even bother to have them.
The Facebook IPO is the biggest rip-off in history. Zuckerberg alone is not to blame.
The lead banker, Morgan Stanley, assisted by the now-notorious Jamie Dimon of JPMorgan, structured the deal. For their work, Morgan Stanley and the other underwriters were paid roughly $170 million in fees for handling the IPO and raking in the investors.
Then there were the Nasdaq “problem.” It was claimed that the I.P.O’s unprecedented size presented an enormous challenge for Nasdaq. This is misleading to put it in polite terms. Nasdaq normally trades 1.5 trillion shares a day. True, the IPO was 400+ million shares, but Nasdaq could cope with that. Nasdaq’s “failure” in confirmation of clients” trades led to unprecedented confusion and later chaos. A number of investors dumped shares on the first day due to the confusion which send the shares plummeting below their IPO price, when the underwriters had step in.
So we have two stories regarding Nasdaq – too much volume and a failure to confirm clients’ trades. Over the course of time, other excuses and misinformation will surely emerge. The fact is that Nasdaq was colluding with JPMorgan and friends to keep Faceback shares from crashing in value during the IPO. This did work—during the IPO—but the stock price crashed anyway.
The investors finally woke up and filed suit in Manhattan federal court on May 23 against Facebook, Zuckerberg, and underwriters Morgan Stanley, J.P. Morgan, Goldman, Sachs & Co., Bofa Merrill Lynch, Barclays Capital, Allen & Company LLC., (the usual suspects) accusing them of misleading them about the company’s financial prospects.
Shareholders said research analysts at several underwriters had lowered their business forecasts for Facebook during the IPO process, but that these changes were “selectively disclosed by defendants to certain preferred investors” rather than to the public generally.
In other words, Wall Street knew what was going down, but Main Street was left in the dark.
So, what else is new?
May 31st update: Morgan Stanley CEO James Gorman dismissed outrage over Facebook’s botched initial public offering, calling investors who had expected immediate gains “naïve” for having “bought it under the wrong pretences”. Huh? Should the investors have expected to take heavy losses, James? Should the investors have expected Facebook to break all previous records for dollar value lost on a new IPO?
James Gorman didn’t stop his con job there—he also defended the decision to expand the size of the IPO, saying, “We had unprecedented retail demand?” Maybe he should have said, “We had unprecedented greed on our part.”
Then Gorman tried to lay some blame on Nasdaq for sowing “confusion” on Facebook’s first day of trading. As we pointed out, above, Nasdaq’s “computer glitches” were actually done to protect Gorman’s Morgan Stanley and the other underwriters—the usual suspects.
Finally, seeking a bit of undeserved sympathy, Gorman said “Give this a little bit of time … We’re only on day eight here.”
Scott Sweet, senior managing partner at investor advisory firm, IPO Boutique, said: “Anything that makes it seem as though it wasn’t that bad is wrong. This does not happen with deals like this. This happens with fourth-tier underwriters.”
Scott was nearly right, he should have said “This happens with crooked underwriters.”
June 2nd update:
REUTERS reported that, on June 4, Facebook’s website suffered sporadic outages on Thursday, anywhere from half an hour to two hours according to various blogs, tweets and affected users, but the company said the problem has been fixed. This is yet another example of our young techies failure to understand how to build a datacenter. It’s not their fault—blame in on the educational system which believes the world begins and ends with PCs. The PC-oriented datacenter is a mass of PCs all hooked together by external (and slow) wires to communicate between them. Throw out that junk and install IBM mainframes using Sysplex to keep them in sync. If one goes down the other jumps in immediately. There is also a major savings in rent, air-conditioning, and even wires.
From the prospectus
The Facebook prospectus states, “Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes and is convertible at any time into one share of Class A common stock. The holders of our outstanding shares of Class B common stock will hold approximately 95.9% of the voting power of our outstanding capital stock following this offering, and our founder, Chairman, and CEO, Mark Zuckerberg, will hold or have the ability to control approximately 55.8% of the voting power of our outstanding capital stock following this offering.”
CLASS A COMMON STOCK
Facebook, Inc. is offering 180,000,000 shares of its Class A common stock and the selling stockholders are offering 241,233,615 shares of Class A common stock. We will not receive any proceeds from the sale of shares by the selling stockholders. This is our initial public offering and no public market currently exists for our shares of Class A common stock. We anticipate that the initial public offering price will be between $34.00 and $38.00 per share.
We have two classes of common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock are identical, except voting and conversion rights. Each share of Class A common stock is entitled to one vote. Each share of Class B common stock is entitled to ten votes and is convertible at any time into one share of Class A common stock. The holders of our outstanding shares of Class B common stock will hold approximately 95.9% of the voting power of our outstanding capital stock following this offering, and our founder, Chairman, and CEO, Mark Zuckerberg, will hold or have the ability to control approximately 55.8% of the voting power of our outstanding capital stock following this offering.
For the mathematically inclined, Zuckerberg and friends sold 241,233,615 Class A shares for $9,166,877,370 while Facebook sold 180,000,000 Class A shares for $6,840,000,000.
No control for the public shareholders, only for the insiders
No Class B shares were sold to the public.