Caveat emptor for Facebook launch

Way back in 1916 a New York Judge, Benjamin N. Cardozo, established that privity of duty is no longer required in regard to a lawsuit for product liability against the seller.

Last week, In the same city, Facebook shares priced at $36 were released to their clients, the large institutional investors, mutual funds and hedge funds: 11am came and went, with no trading. The next half-hour was full of handwringing and confusion until shares began trading around 11.30am. Trading was fast and intense, with more than 80 million shares changing hands in the first 30 seconds, valuing the company at over $100 billion.

At that price, Facebook’s IPO raised $18.4 billion, beating the $18.1 billion raised by General Motors in November 2010, making it the second largest US IPO ever, trailing only the $19.7 billion raised by Visa in March 2008

Until now, Mark Zuckerberg – who, as the movie showed, created the entrepreneurial venture in his Harvard dorm room – has resisted mononerds like Google and Yahoo whilst still in his 20s. He has tried to protect the company from early sellers, with lock-in clauses that will hold the line for up to 211 days. Already Zuckerberg has lost a couple of billion dollars in small change with the price plummeting after its launch to just above $30.

So now is the time for smart companies to remember to sniff tulips and hyacinths and remember that the dotcom bubble popped in 2000 – along with the millennium bug and the AOL-Time Warner merger.  

According to Wikipedia, the doctrine of privity in the common law of contract provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it. The premise is that only parties to contracts should be able to sue to enforce their rights or claim damages as such.

When Facebook shares opened for trading, retail traders could not fire out orders to buy Facebook stock on opening without first having set price boundaries for their trades, done by entering “limit” orders. Individual investors hoping to ride any day-one pop in the stock initially wouldn’t be able to buy at any cost.

With seemingly unceasing demand for Facebook’s extended public offering, the banks in charge of selling the stock to investors might seem to have had the easiest job in the world. But there’s a delicate art to pricing the IPO. Lead underwriter Morgan Stanley and the 32 other banks Facebook tapped to sell the offering had to decide on a price that caused the stock to pop in the first few days, while creating demand from the right type of investors: the “buy and hold” kind.

Brokers handling the social media public-market debut this week have been reminded of a little-known rule, implemented in late 2011 and designed to dampen heavy price swings in newly minted shares. The rule blocks so-called “market orders” that may seek to buy at the opening of an initial public offering. That means that retail traders won’t be able to fire out orders to buy.

History suggests a caveat emptor approach, as out of 31 internet IPOs held since the beginning of 2011, 22 are currently trading below their closing price on the day they went public. Here’s an even scarier stat: 16 are trading below their offer price. Internet IPOs get a nice bounce on day one of public trading then slide off in subsequent days and weeks. Wall Street analysts remain concerned about Facebook’s slowing growth, weak ad sales-per-user numbers and lack of monetisation of its mobile products.

The warning to traders comes from the experience of Linux, a PC company whose shares jumped 698% in its first day of trading – still a US record. That stock also never traded higher than on its IPO day, falling from $239 all the way down to $8.47 a year later.

The take away for smart companies seeking to join the IPO frenzy is to take your time, build your customer base and exit at the best possible time – and don’t hand over your baby until it’s well and truly out of the dorms. You can’t make money flipping stocks, so don’t bother. If you want to own Facebook for the long-term, either because you “like” the company or as a diversification strategy, relax and wait until the dust settles. If you must you can still get some tokenss in a week or two.

The positive message out of all this is that social media has become a platform that offers brand managers increased communication for greater brand awareness and, often, improved customer service.

Dr Colin Benjamin is an entrepreneurship and strategic thinking consultant at Marshall Place Associates, which offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship. Colin is also a member of the global Association of Professional Futurists.