Wednesday, September 5, 2012

Confessions of Mark Cuban: The Facebook IPO Sucker

In the comments below, Mark Cuban really nails it. For some time, I have been thinking about putting out a column along the lines of the one Cuban has written. Most times Wall Street operators   outplay companies going public, leaving plenty of money on the table for WS and IPO traders. In the case of Facebook, Facebook out snookered WS and the traders. It doesn't happen very often, but it was well played by Facebook, as Mark Cuban explains:
Andrews Ross Sorkin wrote a piece for the NY Times that was just ridiculous. He put the blame squarely on the back of the CFO of FB. Talk about getting it 180 degrees wrong.
Have you ever been to an auction where the selling party told a buyer to reduce their price because they were worried that the item might not hold its value ? Neither have I.  If the CFO of Facebook came on SharkTank and told me that he was able to sell his shares to the public for $38 a share, but turned down the opportunity, I would crush him for being an idiot.
Facebook was able to raise about 10 BILLION DOLLARS in this IPO. The CFO’s job is not to manage shareholder portfolios. His job is to help Facebook succeed. I don’t know about you, but putting 10 BILLION DOLLARS in the bank in my opinion is one way to help them succeed.
Who’s job is it to help manage the portfolio’s of FB investors ? If an investor doesn’t manage their own portfolio, the brokers who sold them the stock are responsible.  It’s their job to read the prospectus if you as an investor are too lazy to do so.  It is the job of the broker to help the investor understand the value of the company and make a buying decision. No question that there are a lot of brokers out there that did not do their jobs.
As far as traders who bought the stock hoping for a pop. No one cares about them. Seriously. You trade, you know you are going to lose on trades. That is how things work.
I bought and sold FB shares as a TRADE, not an investment. I lost money. When the stock didn’t bounce as I thought/hoped it would, I realized I was wrong and got out. It wasn’t the fault of the FB CFO that I lost money. It was my fault.  I know that no one sells me shares of stock because they expect the price of the stock to go up.  So someone saw me coming and they sold me the stock. That is the way the stock market works. When you sit at the trading terminal you look for the sucker. When you don’t see one, it’s you.  In this case it was me.
If the goal of the company is to maximize the cash obtained from the IPO, then the CFO should absolutely price the stock to maximize the return. If the goal of the company is to get a 1 day pop to make a PR splash , that is a completely different strategy. It obviously was not the strategy of Facebook.  Facebook maximized the cash available to it. They have been very clear that they will not manage the stock, they will manage the company to reach the goals they have been very open and honest about. Good for them.
 Read the rest here.

Note: This doesn't mean that companies should go around screwing new investors. It does mean that you have to go into these things with your eyes wide open. Most of the time in IPOs, it is the company going public that is being taken advantage of by the investment bankers and traders, because the stock is priced too low when it goes public. In this case, Facebook somehow managed to get the edge over the usual operators (To the tune of billions!!). Again, well played, Facebook.

This comes back to another point I have made about WS.

On WS, everyone is out to grab every penny that is on the table. If you don't know how the game is played, you should stay away. If you understand the game, then it is not impossible to take down some pretty big sharks, no new regulations needed. New regulations always benefit the sharks, since they will have the ability to buy lawyers, congressmen and lobbyists. Instead of worrying about new regulations, just figure out how the game is played and if you are sharp enough, you can out play these guys and put some nice change in your pocket.


  1. While it's not the job of the CFO to manage the volatility of the stock price, it is the job of the CFO to set and meet quarterly revenue/profit expectations with Wall Street.

    In not over-ruling the investment bankers on initial price recommendations, this CFO has tarnished his credibility and made his job more difficult on a quarterly basis, not to mention a subsequent fund raising!

    1. At IPO fhe EPS was over 150 times earnings. Very high expectations to meet future earning goals and make money on this stock. This was a trader's short term play only or a great stock to short. Cuban was waiting for the bigger suckers but it appears he waited a bit too long and they did not come in to pop the stock much. The venture capitalists made out very well also.

  2. I agree with the article. Investment products bankers work for their clients. Their clients are selling stock. Their job is to get the best price possible for their clients. The difficult part of this is now most investment banks also have retail and institutional stock brokerages attached to them. Brokers are looking out for the buy side in these transactions. Ibank presidents have the unfortunate job of moderating the cat fights that break out between these opposing factions within the bank.

  3. I was watching this laughing at all my friends who have lost %50 of their money on this trade. I bought GLD 3 weeks ago and I am up %5. What sounds too good to be true usually is, especially when there is profit in creating a false reality.