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Commentary

FaceBook and Unfair Disclosure

The Facebook IPO has underwhelmed. US IPOs are first sold to any investor who can wiggle a favour from their broker, and then listed. The IPO was at $38 and the stock went to $44 when it listed on Friday, before falling back to $38. In the two days since, it has fallen over 20% to end at $31 last night.

People are crying foul – how could an IPO of this size go down? How could Facebook, valued at a mere $100 billion, now be worth just $80 billion?

There was one strange occurrence in the middle – analysts at Morgan Stanley, Goldman Sachs and JP Morgan, lead underwriters to the IPO, lowered their estimates of earnings for Facebook, while the IPO was on. The change was then selectively disclosed to only a few investors, who presumably used the information to not buy the IPO, leaving other investors including retail holding the bag.

This estimate change, it seems, was because they got information from Facebook that their estimates were too high.  Facebook told only the underwriters about this, and the eventual selective disclosure is unfair to other investors. Read Barry Ritholtz’s post with links and Business Insider’s post.

Normally, this is not such a big problem. The estimates were not Facebook’s, they were private estimates. That they revised them based on a discussion with the company is not a big deal, if Facebook were a long listed company. That they revealed it selectively is also not such a big deal; in other cases, analysts do reveal information only to clients.

But Facebook was an IPO. No one else had any material information other than, presumably, the underwriters. There was no history to speak about. So if an FB official told the underwriters to lower estimates, it was material information that needed to be disclosed to all investors, since they would only have the underwriter’s estimates as their benchmark (other people don’t have that quality of disclosed information until the company has gone IPO). It’s unclear though that Facebook actually stated that estimates were low, or just "signalled it" or such.

There will be more to hear on this topic, but as Indian IPO investors have learnt, all information is asymmetric by nature.

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