Last year, Chris and I did a TechStuff episode about Facebook’s IPO and the controversy surrounding it. Facebook’s opening stock price during its IPO was $38 per share. In theory, a company’s stock price should reflect the value (and potential value) of that company. You take the number of shares that exist, multiply it by the share price and you’ve got a rough estimate of a company’s value. In Facebook’s case, that value amounted to a whopping $16 billion. But questions about Facebook’s real value began to pop up shortly after the IPO and that’s where we run into trouble.
Facebook’s financials didn’t reflect an emerging trend that had the potential to affect the company’s value dramatically based on internal projections. That trend was the rise of mobile usage of the Facebook platform. You see, Facebook has trouble monetizing mobile usage to the same extent as it can for web-based visitors. This is a problem that’s not unique to Facebook — the mobile web has just about everyone struggling to find ways to make a revenue model that works both for companies and for customers.
The shift in platforms meant that although Facebook continues to see a huge amount of traffic, it can’t monetize all of that traffic effectively. Some major investors in Facebook were made aware of this information, giving them the option to sell off shares of stock at the opening price before the market adjusted Facebook’s value to reflect the real situation within the company. But everyone else remained unaware of the issue until after the IPO. That’s the basis of the lawsuit — that Facebook and its underwriters acted unethically by allowing people to buy shares in Facebook at a price that was higher than the company’s actual value. Those people all saw a loss as Facebook’s stock price fell shortly after the IPO.
Today, Reuters reports that Facebook and its underwriters are asking U.S. District Judge Robert Sweet to throw the case out. The main thrust of the defense is that the courts have held in the past that companies aren’t required to disclose internal projections that might — but might not — affect future revenue. Their argument is that this case could set a precedent that makes it harder for companies to raise money. If you take the argument to an extreme, you could say that a company would have to disclose all conceivable outcomes that could come to pass based upon current conditions. That’s not a realistic expectation. Whether Judge Sweet will agree with that argument remains to be seen.
Personally, I’m not thrilled with how Facebook handled its IPO. While you can argue that an internal projection only gives you an idea of what could happen in the future, the move to mobile has been going on for a few years now. It’s an undeniable trend and there’s no sign of it slowing down. When something that fundamental doesn’t make it into a public disclosure, it looks a bit suspect in my eyes. That being said, I’m not an investor in Facebook nor am I a financial expert (though I have a lovely collection of piggy banks).
What do you think? Did Facebook lead people on into thinking the company was worth more than it was? Or is this all a fuss over nothing?