24 May 2012

Facebook's IPO, Austerity and You

As the bell chimes this morning to signal the opening of the US stock markets, Mark Zuckerberg can be forgiven for believing that this bell tolled for him, for at the start of the fourth day of trading for Facebook after its much-heralded IPO last Friday, all is not well with his company's flotation. Facebook stock has already lost more than 25% of its value in less than four full days of trading, and now comes word that the triumvirate of financial institutions overseeing the IPO, Morgan Stanley, JP Morgan and the vampire squid itself, Goldman Sachs, are all being investigated by regulatory authorities for most irregular practices in the run-up to the IPO, with allegations being made that all three withheld negative information about Facebook's revenue forecasts from ordinary investors, but shared it verbally with a golden circle of insider and institutional investors shortly before the stock went public, while simultaneously large numbers of shareholders are taking legal action against the company and the IPO underwriters for the botched IPO.

It appears that shortly before the IPO it, along with Morgan Stanley and JP Morgan were verbally telling their top clients that Facebook had amended its revenue projections downward in a private pre-IPO filing with the Securities Exchange Commission (SEC) that was not available in a published format for ordinary investors. While publicly Facebook was still aiming to debut at around $40 a share, privately it would appear that the triumvirate overseeing the IPO may have been advising their top clients that a price of around $32 a share was what the stock was really worth. When the stock debuted at $38 initial demand from ordinary investors quickly drove it up to $42, before it rapidly sank back down. Institutional investors, pre-warned by the triumvirate, largely held off trading until the price hit the $32 mark, leaving ordinary investors largely underwater, though the vampire squid Goldman Sachs itself off-loaded nearly $1.09Bn of its own stock in Facebook at a price of $38 per share almost as soon as trading began.

Investors in Facebook can now take their place beside the citizens of Greece as victims of Goldman Sachs' "mental reservations" when it comes to giving financial advice and "assisting" with their economic difficulties.

The SEC and other authorities have begun an investigation to see if this withholding of information was a breach of regulations, and more importantly, if all three financial institutions withheld the information at the request of Facebook itself.

The IPO itself was marred by a technical glitch in the NASDAQ trading systems that delayed the launch by 30 minutes from 11am to 11:30am, and once trading was opened it would appear that a sizable number of those initial trades were not officially registered. Many investors, mostly individual as opposed to the pre-warned Institutional ones who were waiting for the price to drop and then level out, received no official conformation that their purchase had been registered, and thus as the stock price started to plummet they were were stuck in a trading limbo unable to try and resell them immediately to prevent even greater losses.

Curiously enough at almost the exact same time as the Facebook IPO debuted, another tech stock drama was taking place on the NASDAQ with Zynga, producers of the FarmVille social gaming franchise. Zynga stock began a nosedive shortly before the Facebook debut, dropping by 14% and triggering an automatic suspension of trading at 11:37am. This break is supposed to last five minutes in a effort to disrupt panic selling, instead for some unexplained reason it lasted for fifty minutes, then resumed and almost immediately was suspended again for a further hour. It is worth mentioning at this stage that Zynga, through FarmVille and other social games, accounted for 12% of Facebook's revenue in 2011. The current assumption is that Facebook's poor debut caused Zynga's stock to tank, but it is certainly unusual that while all eyes were focused on Facebook, trading in one of its largest revenue generators was suspended for almost two hours due to "technical difficulties".

There seemed to be a lot of that going around on Friday.

So just to recap the events leading up to the IPO, and on the day itself - 1) Facebook in a private filing to the SEC warns of a slowdown in growth, 2) That revised forecast is passed on by Moragn Stanley, JP Morgan and Goldman Sachs verbally to their top institutional investors, the wider public are never informed, 3) Due to extreme media hype when Facebook debuts its stock rises to $42 in the initial minutes of trading, pushed up by thousands of ordinary investors eager to get their hands on what they have been told is a sure thing 4) a "technical glitch" prevents ordinary investors from knowing if their trade has been processed or not, 5) the share price starts to drop, Goldman Sachs sells $1.09Bn of its own stock in Facebook at a price of $38 per share, 6) Zynga starts to nosedive, trading is suspended for two hours due to a "technical glitch", 7) Facebook continues to drop, ordinary investors are unable to sell their overpriced stock as due to a "technical glitch" they are unsure as to whether their original purchase has been registered or not, 8) Morgan Stanley starts to buy back Facebook stock at $38 in an effort to shore up the price, but as an underwriter of the IPO it also makes 1.1% of each trade in underwriter's fees. The current assumption is that once the share price started to drop on the day of the IPO, Morgan Stanley bought up the majority of shares, and between them the triumvirate of underwriters made a profit of over $100 million in underwriter's fees alone by buying back tumbling Facebook stock.

So why does all of this matter to us apart from showing, once again, the critical inequality and flaws at the heart of the capitalist system?

Any growth projections for Facebook that are used to justify its inflated opening price would have to rely on significantly increased international revenue, and from September 2010 all of Facebook's non-US/Canadian revenue is billed by its Irish subsidiary in the Grand Canal Docks, as part of the now-infamous Double Irish/Dutch Sandwich mechanism that all the tech giants use to avoid US tax on non-US income (for example it is estimated that Google pays an effective tax rate of only 2.4% on revenue that flows through its European Headquarters on Barrow Street, not even the pathetically low official Irish corporate tax rate of 12.5%). Aside from the revenue opportunities that are being lost to the Irish exchequer by facilitating such a massive amount of tax avoidance, all the international revenue that flows through the tech giants' Irish HQs is counted as exports by the Central Statistics Office.

According to a report back in April this means that the actual value of Ireland's exports is at least a third less than what is officially reported, because of tech giants like Facebook (as well as Big Pharma) booking foreign profits through their Irish HQ to avail of our relaxed tax regime. If a third of our exports exist only because of the questionable accounting practices used by the tech giants, then it means that our official GDP is massively dependent on the oversees activities of these companies - in effect our GDP is partly dependent on how many Japanese play FarmVille, or how much advertising Facebook can sell in Korea, even though neither activity might be coordinated from Dublin.

If the Austerity Treaty is passed during the Fiscal Compact Referendum next week, then Irish law will be changed to mandate that the maximum structural deficit that we could have would be 0.5% of GDP. Thanks to our national accounting practices where the foreign activities of US multinationals somehow manage to appear as Irish exports, we would be tying ourselves into a fiscal straightjacket the strings of which would be loosened or tightened not by us, but by US plutocrats who would not even be aware of the consequences of their actions (not that they would care if they were). Our economic freedom would become no more than flotsam randomly swept up and carried along by the tsunami of US ultra-capitalism.

Although our GDP may look healthy now, boosted as it is by all these paper exports, if Obama wins a second term there are strong indicators that he would clamp down heavily on the ability of US companies to use Ireland as a tax-refuge. Irregular financial dealings at the very start of Facebook's life as a public company will only shine the spotlight tighter on the accounting practices of it and all the other tech giants that launder their money through Ireland Inc. With such a sizable amount of our GDP outside of our own control, permanently wedding our future national budgetary ability to the dodgy accounting practices of amoral multinationals is surely an act of madness.

But as King Leonidas might have said said, "Madness? This is Irelaaaaaaaaaand!"

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