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Charlie Breaks It

Facebook Tells Wall Street Why it Screwed Up; Twitter Reevaluating IPO Plans

Facebook Causing Twitter to Re-evalute its IPO Plans?

FBN’s Charlie Gasparino on Twitter’s re-evaluation of its IPO plans after Facebook’s IPO debacle.

We screwed up our IPO because we wanted to screw Wall Street.

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That’s the explanation recently delivered by Facebook (NASDAQ:FB) chief operating officer Sheryl Sandberg to at least one prominent institutional investor about how the social media network so badly misjudged investor demand and flubbed its much-hyped initial public offering in May.

Shares of Facebook have declined more than 50% from its IPO high, and company officials have recently launched a charm offensive with large institutional investors to try and entice them back into the stock amid growing market discontent about the company’s future prospects, and the ability of management, particularly the company’s 20-something CEO Mark Zuckerberg, to deliver future earnings growth.

The flubbed deal has had far-reaching implications, making already skittish small investors even more hesitant to jump into the stock market.

In addition, FOX Business has learned that Facebook competitor Twitter is reevaluating the timing for a possible IPO following Facebook’s problems. A person with knowledge of    Twitter’s plans says any IPO could be a year away, as senior management determines how best to deliver earnings as a public company. Company founder Jack Dorsey is working with JPMorgan (NYSE:JPM) CEO Jamie Dimon on Twitter's future, this person says.

A spokesman for Twitter had no comment. A JPMorgan spokesman also had no comment.

Sandberg, 42, has been widely regarded on Wall Street as Facebook’s “adult in the room” largely for the decade she spent as a senior executive at tech giant Google. But some of her recent remarks about Facebook’s ill-fated IPO have large investors and Wall Street analysts questioning her abilities as well.

Sandberg told a large institutional investor at one recent meeting that the firm decided to price the IPO at $38 a share—in what underwriters believed at the time was a steep price—not just to get the most possible money out of the deal, but also to avoid Wall Street traders from “flipping” the stock, meaning they would buy shares at the opening price and sell them sometime later at a profit when shares start to rise amid additional investor demand.

Sandberg said the company was seeking long-term investors who believe in Facebook’s future, this person said.

But when the investor questioned her on why the company allowed insiders and venture capitalist financiers to immediately trade out of the stock, she explained that was part of Facebook’s “culture,” according to one person with direct knowledge of the conversation.

“Sandberg basically said that Facebook is a Silicon Valley company that doesn’t want to make Wall Street traders rich, but has no problem making the people in Silicon Valley wealthy,” this person said.

Recently, Facebook has faced criticism for allowing venture capitalists, such as early Facebook backer Peter Thiel to sell nearly his entire stake just a few months after the IPO. Other companies demand that investors abide by far longer “lock up period” where they have to hold onto shares for a longer period of time.

Through a spokesman, Sandberg had no comment.

One of the problems with Sandberg’s explanation is that the firm and its underwriters at Morgan Stanley misjudged the appetite for shares among institutional investors who would normally hold the stock. Many institutional investors balked at the initial pricing, which is why underwriters pushed so many small investors into the deal.

Meanwhile, Wall Street traders still enjoyed a decent payday on the IPO when it spiked from its $38 IPO price to $45 in initial trading. Many sophisticated traders sold the stock when it hit around $40 a share.

Many small “retail” investors, however, bought the stock when it was near its highs. Unlike large institutions, these investors were not briefed about the company’s projections of deteriorating revenue and profit growth in the days prior to the IPO.

Small investors also experienced more difficulty buying shares and selling shares because of a technology glitch on the Nasdaq stock market, where the IPO was sold.

“Flipping a stock that goes up is just part of the business,” said Michael Pachter an analyst at Wedbush Securities. Pachter said the stock is down for the simple reason that Zuckerberg, Sandberg and senior Facebook management  “just misjudged demand.”