Comment: Facebook’s legacy - hype, hubris and hysteria

By TERRY MURDEN
Published on 24/05/2012 00:00

AFTER the euphoria, the recriminations. Those who questioned whether Facebook was over-valued on its flotation are now seeking their day in court after the shares suffered an embarrassing slump.

It’s not as if no-one was questioning the $104 billion (£65bn) price tag placed on a company in the run-up to the initial public offering (IPO).

But in two law suits now lodged against those involved, the allegations go well beyond market predictions. Chief underwriter Morgan Stanley and others are accused of lowering their forecasts for Facebook during the IPO process, but only informing “certain preferred investors”.

The clamour for shares led to the price being raised amid wide expectation that they would soar on their first day of trading. Instead, they closed near the issue price and have been falling this week, prompting some investors to claim damages.

For Morgan Stanley this is a serious humiliation over an issue that should have been its best yet after it introduced other technology new boys such as LinkedIn and Groupon to the market. Aside from the legal claims, it faces an investigation from regulators. Its management is accused of botching the flotation, setting the price too high and selling too many shares to the public.

But was Morgan Stanley another victim of the hype?

Facebook admitted ahead of the IPO that it faced a number of challenges to its growth, not least its users’ increasing use of mobile devices which does not yield much revenue for the company. The efforts of underwriters to revise down price expectations didn’t work and they found themselves swamped with orders for stock. It’s said that demand from American investors alone exceeded the number of shares by 20 times.

With demand so high, the price was fixed at $38 a share, after toying with $40, and there were forecasts of it hitting $50 or more on the first day. But as news emerged of the revised forecasts, at least one investor unloaded hundreds of thousands of shares at $42 and the shares went into freefall.

Facebook is now regarded as a “broken” flotation, which may impact on the stock for some time and on the broader IPO market.

First and foremost, O’Toole has tough job

BEING the biggest doesn’t necessarily mean being the best. In the case of FirstGroup’s struggling UK bus operations, it appears to mean the problem is that much larger. Under Sir Moir Lockhead, First built its business on the back of the liberalised bus rules, mopping up local services and taking its model overseas.

But Lockhead’s successor Tim O’Toole has found a whole set of problems under the bus division’s bonnet, leading to a 10 per cent fall in operating profits and a tightening of margins.

Rising fuel costs and reduced subsidies are partly to blame, and Scotland and the north of England are proving particularly troublesome. But O’Toole has also identified self-inflicted wounds: price rises and changes to routes that have irritated customers.

Bus companies are suffering from commuters making the unexpected switch from public transport to private cars as they benefit from what is now a marginal cost advantage. But it is the decisions by local authorities to reduce concessionary fares and the government to cut fuel tax relief that have been mainly to blame.

Revenue for the UK bus division is up, more a result of higher prices than more passengers: it’s the profit margin that has been hit and O’Toole is now driving a series of measures to revive its fortunes by investing in ticketing technologies, new vehicles and refurbishing the existing fleet.

The operational issues weighed on yesterday’s statement but O’Toole’s plans, including a previously announced £100 million programme of disposals, are designed to tackle the underlying weakness. Together with results ahead of expectations, fuelled by growth elsewhere in the group, First was rewarded with a healthy lift in the share price on a bad day for equities.

However, the shares are down more than 35 per cent this year and will remain under pressure while the bus business is rebuilt and a number of uncertainties remain unresolved, including the outcome of rail franchise bids which is putting the dividend policy on hold until next year.