If Facebook Were Managed by Private Equity Professionals

January 7, 2013

Most investors appear to be well aware of what went wrong with the hottest IPO of 2012 – the Facebook IPO.  According to KCSA Strategic Communications, 93 percent of survey respondents – attorneys doing the legal work behind the IPO – indicated that Facebook was the most anticipated IPO of 2012.

Not surprisingly, and perhaps largely because of the Facebook IPO problems, 66 percent of the attorneys surveyed indicated that they thought the social bubble had burst, with 89 percent indicating that the Facebook IPO had caused social media companies’ valuations to be lower for at least the near-term horizon.

Among the problems were the fact that Facebook’s stock didn’t “pop” as some investors have come to expect from “hot” IPOs and NASDAQ’s computer glitches, which caused confusion about the status of buy/sell orders.

Although not considered the top problem of the Facebook IPO by Yahoo! commentator Henry Blodget, hindsight appears to indicate that asymmetric information was likely responsible for the lion’s share of the Facebook’s performance problem throughout the year (the stock has gone from an initial price of $38 per share to $26.62 on December 31, 2012).

What is meant by asymmetric information?  It means that big institutional investors – the big investment houses – had greater information than small individual investors; asymmetric information probably caused small investors to be overly interested and large investor to abandon their Facebook positions.

Given exhaustive bureaucratic efforts to make information available to all investors, how could it be that large institutional investors had access to a greater wealth of information than individual investors?

Well, first and foremost, it’s really a myth that bureaucratic efforts to maximize universal information availability are happening.  Institutional investors have access to a good deal more information than individual investors because they are willing to pay for it, and are willing to keep information private.  It’s always been that way and likely always will be that way.  Information is money, and private information is worth a lot more than public information.  So, when Facebook’s underwriters cut their projections halfway through the IPO process, it should come as no surprise that institutional investors got nervous about the future of Facebook’s profitability and took advantage of such semi-private information.

Although, by definition, private equity professionals are not involved in taking companies public, private equity professionals are involved in information and expectation management.  Because the Facebook IPO was largely an issue of information mismanagement, the real question is: which grouping of financial professionals – private equity professionals or investment banking managers – are better at managing the flow of information?

The question can’t be quantitatively answered within the confines of this blog post (and probably not likely with a few thousand academic studies), but it is a question individuals considering using the services of one of the two groups should consider before moving forward with their financial future.  One group generally maximizes wealth by keeping information private, while the other group maximizes wealth while balancing required information disclosure with information most useful in private hands.

Although it’s only speculation, the bottom line is that most financial professionals would probably give a positive affirmation to the statement: Facebook would be worth more today if it had gone with the services of private equity professionals instead of investment banking professionals.

Overall, the management of information in the financial world matters, and Facebook is case in point of information mismanagement.



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