Politeía Digest

Quis custodiet ipsos custodes?

Inside Job: Facebook I.P.O. Shows System

leave a comment »

Rational Irrationality
John Cassidy on politics, economics, and more.

Monday morning’s big fall in Facebook’s stock hardly came as a shocker. It was clear on Friday that, at the offering price of $38 a share, there were more sellers than buyers. The only reason the stock held up was that Morgan Stanley, the lead underwriter on the initial public offering, stepped in and supported it. At the opening of trading this morning, the stock fell $5, to $33, before rebounding a bit. (At 2:30 P.M., it was at $34.75.)

That’s bad news for investors who thought their luck was in when they were allocated some Facebook stock. It’s also worrying news for I.P.O.s and the capital markets in general. In fact, a strong argument can be made that Facebook’s shaky start as a public company demonstrates that the entire I.P.O. process, which is supposed to spread the rewards to innovation, is broken. By the time Facebook’s stock started trading on the public market, insiders—the company’s founders, employees, and venture-capitalist backers—had bagged most, if not all, of the company’s value for themselves.

That’s fair enough, you may say. Mark Zuckerberg and some Harvard pals created the company. It was Facebook’s professional managers, such as Sheryl Sandberg, the chief operating officer, and David Ebersman, the chief financial officer, who turned it into a real business. And it was some savvy venture capitalists, such as Jim Breyer of Accel Partners, and David Sze of Greylock Partners, who first spotted its potential. Surely, these are the folks who should be rewarded. (Bono’s investment, which my colleague Virginia Cannon wrote about, also falls into the reasonably early category. In April, 2010, Elevation Partners, a venture-capital firm in which Bono is a partner, paid ninety million dollars for one per cent of Facebook.)

Up to a point, I would agree with you. But the I.P.O. system only works if it preserves a balance between public and private investors. If this balance is upended, and virtually all of the rewards are reserved for insiders, ordinary investors will refuse to play the game. A dearth of I.P.O.s would hurt insiders along with everybody else. More important, a time-tested system of financing companies, which rewards innovation and makes Silicon Valley the envy of the world, would be destroyed. Read more in The New Yorker


Written by Theophyle

May 23, 2012 at 5:38 pm

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: