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The Facebook IPO is only a few days old, and the organisations involved have emerged with tarnished images.What’s more, the actions and inactions of the parties related to the IPO have precipitated lawsuits and government investigations.
This is not the storybook beginning that most people had envisioned for the king of social networks. Those with varied agendas have jumped on the bandwagon to trash Facebook.
What’s caused this mess? Where will it lead? While my crystal ball broke last week, I hope to answer these questions from my marketing point of view. The good news for Facebook is that it is likely to live happily ever after
Facebook road show sets high expectations
Being rookies at going public, Facebook executives conducted a road show to generate interest in their stock. The anticipation of releasing the stock was already high as a result of the secondary market that had developed. Therefore, the road show may have been counterproductive because some spun it as an example of overselling, or hyping the stock. Overselling is rarely good. It is what inexperienced sales people do when they are insecure about their product. Veterans, such as Apple, often understate performance to set lowered expectations. They know that beating expectations will make the stock price pop, whereas falling short of expectations has negative side effects, such as a falling stock price, lawsuits, and a tarnished corporate image. In fairness to Facebook, the company warned its investment bankers of risk factors that could lower company earnings. These risk factors were also disclosed in Face book’s S-1 filing, which many pundits used at the time to disparage Facebook.
Investment bankers mistakes
Based on the information provided by Facebook, the investment bankers led by Morgan Stanley lowered earning estimates in advance of the IPO. However, many say that they only told selected clients. At about the same time, based on assurances from Morgan Stanley that there was plenty of demand for the stock, David Ebersman, CFO of Facebook, decided to boost the number of shares it would offer investors by 25%. Some believe that this was a key reason why the stock price did not soar on the first day of trading. Of course, when the stock did not jump up as anticipated, this became a big news story, and the stock had its own image decline. Based on this unexpected news, many investors ran for the exits and the share price continued to slide.
NASDQ glitches round out the perfect storm
Robert Greifeld, NASDQ CEO, admitted that technical problems caused a 30-minute delay in the trading of the stock and left many investors unsure of their ownership status or the price they paid. In addition to being embarrassing to NASDQ, this got the stock off to a rocky start, and interrupted any momentum the stock may have gathered during its crucial first day of trading. It may have done far more damage to the exchange’s previously largely untarnished image. This, in turn, may cause others to choose other exchanges for their IPOs. Similar to the effect of false starts, on runners or swimmers in a race, it is hard to know the full impact these glitches had on Facebook’s stock debut – especially with investors who are easily rattled by irrational factors associated with bad luck, omens, and karma.
Light at the end of the tunnel
Despite the image damage this Facebook IPO “comedy of errors” may have caused all those involved, fundamental facts still remain in Facebook’s favour. Facebook has 901 million users that spend a whopping average of 20 minutes per visit. It has more information on its users than other social media sites – giving advertisers the ability to more efficiently and effectively target their messages to the right engaged audience. Just today, it announced a deal with TBS where Turner will bundle Facebook ads with its own digital and TV inventory in a single package to promote branded content. This is likely to be just the first of many deals since broadcast networks have to be excited about the promise of reaching large audiences on a daily basis that television can reach only once a year during the Super Bowl. Once big advertisers learn the enormous benefits of connecting with large social networks, they are likely to jump on the bandwagon too.
Facebook is being run by a very smart kid that has the good fortune of having some very capable adult supervision. It will stumble as it begins to walk and run. What smart companies do when they stumble is they learn from it, and use it as an opportunity to become stronger. I am guessing this is what Facebook is going to do. The market is beginning to agree with me since the stock price went up $1 per share, or 3.23%, after Needham & Co issued a buy rating.
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