x Abu Dhabi, UAESaturday 22 July 2017

Facebook IPO frenzy takes us back to dot-com bubble territory

Just like dot-com companies back in the late 1990s that promised the earth but were less than capable of persuading paying customers to part with their cash, Facebook may face a similar struggle.

In the run-up to Facebook's now-infamous IPO this month there was barely a mention of this dot-com bubble. AP Photo/Nasdaq via Facebook
In the run-up to Facebook's now-infamous IPO this month there was barely a mention of this dot-com bubble. AP Photo/Nasdaq via Facebook

Selective amnesia, when suffered by the combined forces of the world's investment bankers and market regulators, is a costly condition.

Technology stocks listing on the Nasdaq exchange in New York with ludicrously high valuations whipping up frenzied media coverage despite incomprehensible business plans were the trademarks of late 1990s dot-com largesse.

In the run-up to Facebook's now-infamous IPO this month there was barely a mention of this dot-com bubble, even though it caused us years of economic misery and cost billions of dollars of lost investment when it burst.

But Facebook's road to a Nasdaq listing was one well travelled by its dot-com bubble forebears. It certainly rang many bells for me: I was working on Wall Street back then and spent most of my time poring over lawsuits alleging all sorts of insanity and foul play related to technology IPOs.

The first warning sign on Facebook came just a few days before the listing was scheduled, when General Motors announced that it would no longer be spending money to advertise on the site. But the GM withdrawal caused hardly a ripple as the IPO juggernaut sped closer to the cliff.

Nobody seemed to care too much. After all, GM's Facebook budget was tiny at only US$10 million (Dh36.7m) or so compared with the huge sums it spends on traditional marketing.

But GM is one of the biggest advertisers in the world, and it does not believe that paid advertising on the website works. Surely such a decision calls into question Facebook's entire business model.

Just like those dot-com companies back in the late 1990s that promised the earth but in the end were less than capable of persuading paying customers to part with their cash, Facebook may face a similar struggle if GM's reasoning takes hold.

But the GM decision is only the tip of the iceberg. There are many more throwbacks to the dot-com bubble in Facebook's listing.

Morgan Stanley was the lead underwriter and stands accused of alerting some of its institutional clients in the days running up to the IPO that the original revenue and profit forecasts in the prospectus were a little on the generous side.

In fact, Morgan Stanley and a few other banks involved were given updated guidance by Facebook. Perhaps there is a connection with GM's decision to pull its advertising. We do not know.

This escapade is reminiscent of another common practice of the dot-com era.

Back in 2002, most of the biggest banks on Wall Street - including Morgan Stanley and others helping Facebook with its IPO - were fined a total of $1.4 billion for over-hyping dot-com IPOs with some accused of giving privileged information to wealthy or well-connected clients.

The deal was unveiled by a triumphant New York state attorney general Eliot Spitzer, who is sadly remembered now more for personal escapades than for making Wall Street pay.

There was supposed to be a raft of reforms accompanying the fines, not least a rule forcing Wall Street banks to buy in truly independent research for IPOs of their clients to ensure retail investors got a fair shake.

If the allegations levelled at Morgan Stanley in the Facebook case are true, the regulation didn't help very much, because investment bankers in this case are accused of passing the Facebook updates to clients by word of mouth.

Early investors - such as a select few institutions and Facebook employees - got their shares for $1 apiece and made a handsome profit upon the IPO. It matters little to them if the price falls a bit - or even a lot.

It is the retail investors who feel the real pain, and it is the retail investors who rely on the Securities and Exchange Commission for protection.

More than 300 lawsuits were filed in New York in connection with the dot-com bubble back in the day. It would be a push to expect as many after the Facebook debacle, but I would be willing to wager that the denouement will be just as gripping.

Let us hope that this time, they are not forgotten so quickly.

jdoran@thenational.ae

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