Monday, August 13, 2012

Has Facebook Lost Face?

What happened? Since the advent of Facebook’s $38-per-share price, the stock has done nothing but drop. Was it the investment bankers overwhelming the company, NASDAQ computers malfunctioning and not postponing, overvaluation of Facebook’s claim to an IPO, or simply arrogance and inexperience?

While all of the factors listed contributed to Facebook’s underperforming stock price, Mark Zuckerberg held the final decision. In the world of IPOs, his tech savvy was
insufficient. At 28, he could not know the pitfalls of doing an IPO nor how to commercialize an idea.

In fact, the majority of Facebook’s executive team remains young for their respective industries. It seems they wanted to revolutionize the old generation with their empowered youth. What they got instead was candy to pacify children while adults took care of the big responsibilities. How could Zuckerberg and his team reform the structures in place without fully understanding them?

Had Facebook recruited veteran executives who had the wisdom and experience with publicly traded companies, they could be facing a successful IPO and organization today. Regardless, an experienced executive may have cautioned them to cancel the IPO until Facebook was in a stronger position to support its valuation.

Long before the May 18, 2012 IPO, a number of issues foreshadowed collapse. Against common practice, Morgan Stanley was established as the only lead underwriter. Moreover, Facebook’s value and profitability were questionable. Zuckerberg lacked the wisdom and experience both as a young CEO and so did the people around him. Had he asked for more help or advice from an experienced executive, they may not be dealing with a flailing stock that’s dropped close to 50% since its debut.

From day one, Morgan Stanley played the pump-and-dump game with Facebook. The corporation spent millions creating artificial hype to manipulate the IPO price. At the same time, only a week before the actual IPO, Facebook found a drop in revenues and Morgan Stanley passed on the information only to the institutional investors. Two days before the 18th, Facebook announced the addition of 25% more shares due to demand, raising the total to 421 million shares. On the first day of trading however, Facebook, to the surprise of eager individual investors, performed poorly for the biggest IPO in technology and Internet history.

Morgan Stanley sold their shares on the first day of trading, earning a significant profit. Clearly, they saw the writing on the wall. Zuckerberg, on the other hand, failed to ask the right questions.

Furthermore, though Facebook appears innovative, it only introduced solutions to an old problem. The company found a no-cost solution to connect family and friends, replacing snail mail, telephone calls and expensive travel. Because of the simplicity of the idea, Facebook dominated the social media space, growing into eye candy for investors. Nonetheless, without innovation, there isn’t sustainable proof that is can be commercialized.  

As it stands, commercializing an idea, creating an effective corporate culture, and incorporating organizational structures to support an IPO require seasoned professionals. Zuckerberg tried to prove he was smarter than the market but floundered. Despite the intelligence of young CEOs, it is in their best interest to build an advisory board of seasoned executives into their business model. Without it, only arrogance resides, and as Facebook demonstrated, the cost of arrogance is expensive.

What do you think? I’m open to ideas. Or if you want to write me about a specific topic, tell me the subject matter.  


  1. Ted, I remember when Microsoft was flailing and Windows was crashing multiple times a day. What comes to mind for me is that Mark Zuckerberg is cut from a similar "genius cloth" as Bill Gates.

    I figure that when a genius has nearly a billion clients, and $64 billion in cash, he will figure out how to monetize that relationship, and the relationship with advertisers. I placed an early bet on Facebook, and I am holding onto my shares. Cream always rises to the top.

    1. Thanks for reading the article, Roger. Your comment is really good and valid. And you mat be right. Zuckerberg may be cut from the same cloth as Gates.

      At the same time, Zuckerberg has not proved himself to be innovative. He has, however, shown that is can implement a good idea to solve a long standing problem, which was keeping in touch with friends and family. The phone, letters and travel are the existing ways people solved that problem. I question if a good idea spells genius.

      Also, he was not savvy enough to deal with Morgan Stanley. The details surrounding Morgan Stanley's behavior is astounding. In fact, they are being investigated. Zuckerberg clearly had no idea what he was doing with regard to the IPO. They are saying the stock is really valued at about $9 a share. It will drop more before it goes up. And then there is the possibility that legislation could be passed that would hurt Facebook's ability to gather information. And I have not even mentioned the threat that mobile poses to social media.

      Right now Zuckerberg needs to be innovative. Except, I am unsure that he is really cut from the same cloth as Gates. For his sake, I hope you are right.