Did the CEO Blow the IPO?

By Lyons, Dan | Newsweek, June 11, 2012 | Go to article overview

Did the CEO Blow the IPO?


Lyons, Dan, Newsweek


Byline: Dan Lyons

A dorm-room genius' growing pains.

At Harvard, Mark Zuckerberg was a superstar student, a computer prodigy able, in his spare time, to bang out the lines of code that would become Facebook, a transformational company that in eight years has changed the world.

But in his first big test as a CEO--Facebook's initial public offering of stock--the baby-faced 28-year-old flunked, and badly. Worse, in the wake of this overhyped and poorly managed stock deal, the guy in charge was nowhere to be found. He wouldn't do interviews, or even make a statement.

Which raises a huge question: Is this guy ready to be the CEO of a publicly traded company?

As the IPO wrapped up, the wunderkind hacker appeared to be in way over his head, lacking the skills, experience, and temperament for this job. That's scary because Facebook is an extraordinarily powerful company with enormous influence over the entire Internet--and also because Zuckerberg has craftily arranged things so that he can't be pushed out of his position.

Facebook's IPO was a disaster from the moment shares began trading on May 18. They were priced too high, and too many of them were on the market, so instead of getting the typical IPO "pop," Facebook's stock swooned. Then came a bombshell that the company, worried about a weakening business, had quietly warned Wall Street analysts to lower their projections in the days before the IPO. Privileged clients got the news and backed away from the stock, while everyone else remained in the dark and rushed in to buy the shares. Some early-in-the-day investors lost 25 percent overnight.

The optics, as they say, are not good. Overpricing the IPO made Facebook look greedy and incompetent. Talking about making the world a better place while running a stock deal where rich insiders got richer and regular folks got fleeced makes Facebook look hypocritical. Refusing to talk about the deal makes Facebook look sneaky.

None of this is the right image for a company that is trying to convince 900 million users that it can be trusted with their personal information. "I have no doubt that this is going to hurt their business," says Vivek Wadhwa, a research fellow at the Rock Center for Corporate Governance at Stanford Law School. "Facebook has gone from being a darling to being a villain. Zuckerberg went from being seen as this child-genius rock star to being seen as a thief. People have lost their savings." (Part of Wadhwa's research at Stanford involves developing ethical guidelines for startups, "so we can educate people like Zuckerberg before they learn the hard way," he says.)

Now the finger-pointing has begun. The Securities and Exchange Commission and the Financial Industry Regulatory Authority are investigating, as are U.S. House and Senate committees. Investors are filing lawsuits against Facebook and its bankers for the "selective disclosure" of the bad news before the offering, with one law firm also questioning the fact that two days before the IPO, several insiders, including two Facebook board members, decided to sell more shares than they originally intended.

Some people lay the blame on Morgan Stanley, the lead underwriter, saying the bank gave Facebook poor advice on pricing the deal. And a senior executive inside Morgan Stanley, speaking on condition of anonymity, blames the NASDAQ exchange, whose computers malfunctioned on May 18, which spooked investors in the crucial first hours of trading.

Ultimately, however, the responsibility resides with Zuckerberg, who controls 57 percent of Facebook's voting rights, so even though Facebook's board of directors contains some older, more experienced executives--Netflix CEO Reed Hastings, Washington Post Co. …

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