Facebook IPO Shows Communication Is Tougher than You Think

Talking about the importance of communications in management seems trite. It’s a point made thousands of times before and stressed in one class after another as you work for your business degree.

And yet, for all the emphasis, sometimes the people who should know best either forget or ignore the principle, with disastrous results. The Facebook IPO is a perfect example. Facebook had been building to an initial public offering for a long time. With $2.24 billion in venture capital and other private investments, the company had to repay them all, and an IPO was the best choice.

But the IPO process was terrible. The stock never got the big bounce that you might have expected, which meant the big institutional investors that took large blocks of stock weren’t able to see the first day profit they’d typically expect. In fact, Bloomberg called it the worst-performing IPO of the decade based on its first five days of trading, and that was without the Nasdaq glitches that kept many investors from knowing if their trades successfully completed.

OK, so 2012 may be a bit premature to settle on worst of the decade, given that we’re only two years into it. But the important point is that many saw the IPO as a dud, particularly when the stock dropped below the IPO price, something that people did not expect. The reasons for the feeling of disaster all trace back to poor communications:

  • Nasdaq: The stock exchange had vied with the New York Stock Exchange to get Facebook’s business. Executives must have told the social network that they were ready for the expected onslaught. Apparently, they were not. Maybe the technical people didn’t realize or maybe the executives simply didn’t want to give up the big business. Whatever the reason, Facebook made a decision that hurt them.
  • Facebook: Financial executives follow the progress of sales on a daily basis. They must have seen how revenue projections were getting weaker before they mentioned potential problems in SEC filings. According to reports, though, Facebook dropped this bomb on the underwriters (the investment banks that actually run the IPO) and public just days before the IPO happened. By not communicating reality early enough to let the underwriters plan, they forced a situation where the underwriters had to react at a time when things shouldn’t be changing measurably.
  • Underwriters: The underwriters went wrong in a couple of ways. They reportedly told Facebook that there was plenty of demand for the stock, which led the company to issue many more shares than originally planned, even though it wasn’t clear. But adding the number of shares meant that Facebook reduced the perceived scarcity of them, which depressed the price. Furthermore, when the underwriters learned of the weaker projections, they passed the news along to some of their bigger clients, but not to all of the. Unfortunately, such selective disclosure is not only unfair to investors who don’t hear it, but it might also be a violation of SEC regulations.
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