Why It's Time To Let Up On Facebook

Investors who feel burned should have known better.

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The Facebook logo appears on a display inside the NASDAQ Marketsite as people are reflected in the window in New York's Times Square. Facebook priced its IPO at $38 per share.

I couldn't wait for Facebook's initial public offering, because once it was over, it meant I could stop writing about the most hyped story of the year and move on to more important stuff. Except that the Facebook IPO is still the most hyped story of the year, with fresh headlines seemingly every day.

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By now, it's well-known that the Facebook IPO was a mortifying botch job, with the stock price set too high, too many shares offered, and a bunch of bungled trades right out of the gate. Facebook's stock has plunged from an opening price of $38 to about $27, and its market value has dropped from $104 billion on its IPO day to currently less than $60 billion. Regulators are probing whether the firm withheld key revenue data just days before the IPO, and analysts are clamoring for CEO Mark Zuckerberg to come out of behooded seclusion and say something—anything, really.

I'm sorry, people, but investors with overwrought expectations of The Facebook Century are the ones who deserve a thumbs down, not Facebook itself. It might be worth recalling that when Facebook first announced plans for a stock offering back in February, it sought to raise about $5 billion, with the opening stock price estimated to be in a range between $28 and $35—pretty close to the price now. As the hype grew and Facebook became the trendiest stock since Google, the size of the capital raise grew to $16 billion, with the initial price range rising to between $38 and $42.

This for an unproven company with a dictatorial, 28-year-old CEO, a stunted history of revenue and profit, and an over-reliance on PCs that are quickly being displaced by mobile devices. No doubt, the people who were lining up for Facebook stock on day one included many of the same people who were bidding home prices into the stratosphere in 2006.

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The trading glitches that marred the opening day of trading on the NASDAQ weren't Facebook's fault, they were NASDAQ's. The decision to sell too many shares, at a price higher than the market could bear, falls at the feet of Morgan Stanley, the lead underwriter. Facebook CFO David Ebersman surely had an active role in that decision, and Zuckerberg himself must take responsibility as CEO. But there was apparently pressure from many of Facebook's biggest early investors—otherwise known as owners—to increase the size of the float, so more of them could cash out and redeem their investments.

Now that the air has come out of the bubble, Facebook shareholders are suddenly worried that the social-media upstart might not be quite as invincible as they initially hoped. Zuckerberg has said nothing about the whole IPO flap, raising concern that he's out of touch or simply indifferent.

GMIRatings, which monitors corporate governance, recently gave Facebook a D rating, its second lowest, because of fuzzy rules about perks, bonuses and other incentives, a board that is too cozy with management, and "a long list of shareholder rights abuses."

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Sounds dreadful, except that Facebook thoroughly disclosed all of those oddities in its pre-IPO filings with the Securities and Exchange Commission. Zuckerberg has structured Facebook so that he'll retain an extraordinary degree of control, even now that he must report to public shareholders. He can make huge decisions without even consulting the board, as he apparently did by single-handedly negotiating the recent $1 billion purchase of Instagram. Recall: That was before the IPO. Zuckerberg let everybody know before they bought in that he considered himself king, and planned to remain king.

Facebook's registration statement with the SEC even states that Zuckerberg and other executives, plus family and friends, can fly on company-financed planes, for personal use. So anybody who bought Facebook stock has basically signed off on corporate behavior that would be prohibited at many other firms. Why not hookers and cocaine at the annual holiday party?

It remains to be seen if Facebook or its underwriters broke any rules by selectively disclosing news about slipping revenue to favored investors. But eight days before the IPO, Facebook filed public information with the SEC reiterating the risk that its revenue and profit trends were vulnerable to the changing tastes of its user base, especially as they switched to mobile devices, which make it harder for Facebook to earn advertising revenue. That was apparently the basis for the disappointing revenue numbers that have since depressed the stock price.

Facebook The Phenomenon may be out of business, but Facebook The Company is operating as usual. The end of the hype could be the best thing that happens to Facebook all year. Naive investors could learn something too.

Rick Newman is the author of Rebounders: How Winners Pivot From Setback To Success. Follow him on Twitter: @rickjnewman.