The Facebook IPO Trainwreck

No one is covering themselves in glory in the aftermath of the Facebook IPO.

Lead underwriter Morgan Stanley is battling allegations that it priced the deal too richly.

Facebook insiders are being called greedy for the last-minute increase in the number of shares they sold in the offering.

Facebook’s management is being criticized for signaling analysts to lower their revenue estimates just days before the deal priced – a move that could be a violation of securities laws.  It also appears some institutional investors were informed of the analysts’ downgrade but retail investors were not.

If all that wasn’t enough, Nasdaq has endured a barrage of complaints for breakdowns in its system on the first day of trading that left investors in the dark about the status of their orders.

Predictably, regulators are launching investigations, legislators are scheduling hearings and plaintiff attorneys are filing lawsuits.

This is hardly the place Facebook wanted to be after completing its IPO.  Nor is it encouraging to other firms that are thinking about going public.

Morgan Stanley is clearly in the hot seat. The firm issued a statement late Tuesday defending its actions, but it is standing on narrow ground, asserting that its procedures were “in compliance with all applicable regulations” and that it handled Facebook in the same manner as every IPO.   That’s not enormously reassuring but it may be all it can say right now as it gathers the facts.

Nasdaq also has a lot to answer for.  Its systems are meant to handle high transaction volumes, and its people are expected to test and monitor the infrastructure to prevent these kinds of problems.  It’s not reassuring to hear Nasdaq executives admit they underestimated the scale of the technical problems.  Nasdaq needs to give guidance quickly on how it will address investor losses and repair the weaknesses in its systems.

Even if Facebook shares recover, the events of the past few days will linger in the minds of investors.  It’s too early to know if it will lead to changes in the IPO book-building process, which hasn’t changed much in the past half-century.  If it does, Facebook in its own way will disrupt Wall Street, just as it upended the media and technology sector.


The Three Things Groupon Got Right

Friday was a horrible day for investors in Groupon.  The stock tumbled 6 percent on news that the company would restate it earnings after underestimating customer refunds, which led its auditor to declare the company had a material weakness in its internal controls.

That kind of news is never welcome, and Groupon’s management has a lot to do to win back investor confidence, but at least it didn’t compound its problems by trying to hide bad news.

I give the Groupon investor relations staff high marks for its handling of this episode.  Here’s what they got right:

First, the company openly acknowledged its revisions in a news release, instead of simply filing its annual report and leaving investors to discover the news themselves.  That would have really damaged the management team’s credibility and would have made it difficult for investors to grasp the basic facts about the restatement and understand its effects.

Second, the news release was clear and factual and put the bad news in context.  Reported earnings were lower as a result of the revision, but the company’s cash flow (a closely watched performance metric) didn’t change.  The company also affirmed its previously announced guidance for first-quarter 2012 earnings.

Third, the news release included a quote from CFO Jason Child reiterating his confidence in the fundamentals of Groupon’s business and its value to customers.  The quote served to put a “face” on the news and reminded investors that the company remains on course.

I don’t have a view on the attractiveness of Groupon’s stock or the sustainability of its business model, and management has had more than a few stumbles, but its investor communications have been solid.

Liam McGee Still Needs a Communication Strategy

Hartford Financial CEO Liam McGee on Wednesday announced plans to break up the company, largely along the lines recommended by hedge-fund activist John Paulson, whose funds own about 8.5% of the insurer.   It looks like McGee never put up a serious effort to counter Paulson’s recommendation to separate Hartford’s property and casualty insurance business, despite saying such a split faced regulatory and market “challenges.”

In an investor presentation Wednesday, McGee did a pretty good job of describing the evaluation process that led to the decision to sell Hartford’s life insurance unit and exit the annuity market, and he carefully outlined the events will take place over the next year or so as it executes its plans.  He even did a few media interviews to help shape the coverage of the announcement.

But he’ll need to do even more communicating in the months ahead.

Because, for starters, John Paulson isn’t satisfied.  He issued a brief statement late on Wednesday that said McGee’s plan was a good start but needed to go further:

“While we appreciate the extensive work of The Hartford’s board and management, we do not believe the positive actions announced today address the main problem with The Hartford’s undervaluation:  the lack of interest from P&C analysts and P&C investors in The Hartford’s best-in-class P&C business due to its affiliation with unrelated, low-return and complex businesses.  We do not believe today’s actions will materially increase P&C investor interest in The Hartford.”

Paulson has made a habit of being highly public in his criticism of McGee’s leadership, most notably during the February earnings call  (which I discussed in an earlier post) and has also made his proposal to unlock shareholder value widely available through an SEC filing.

If Paulson persists in his public campaign, McGee and his team might again be forced to change course or further explain the merits of their plan.   They’d be wise to move first, by following today’s initial presentation with a detailed analysis of the expected benefits of the plan and frequent progress updates as they move ahead.   Beyond investors, Hartford’s clients will need a lot of care as the strategic plans unfold.  Losing them is a fast way to destroy value.

Hartford reports earnings in early May, then holds its annual shareholder meeting a few weeks later.  It could be a very eventful time.

Waiting for Bob Diamond’s Bonus

We don’t yet know how much Bob Diamond was paid for running Barclays last year.  We do know the bank will cap cash bonuses at £65,000 (about $100,000), joining a growing list of banks that have bowed to shareholder and public pressure to curb payouts.

Barclays could have reported Diamond’s compensation yesterday, but it decided to stick with the tradition of announcing it when the bank’s annual report is released next month.  By waiting, Barclays missed a chance to underscore its commitment to shareholder value, and it left Diamond himself in the awkward position of deflecting questions about his pay.

He looked uncomfortable and defensive.  It didn’t have to be so.  The bank could have made both announcements simultaneously.

Now Barclays is sure to face another media swarm in a few weeks when it announces Diamond’s compensation.  It won’t be fun for him or the bank.  Because even if Diamond’s pay is cut, he won’t be hailed a hero (no banker would today), and the media will be sure to replay all the unpleasant issues – the bank’s weak performance, its unhappy shareholders and the public outcry over the industry’s bonus practices.

It won’t be surprising if Barclays looks back a month from now and realizes, too late, that it should have made both announcements on the same day.  By doing so, it could have addressed all the issues at once, and given Diamond a chance to speak openly about risk, reward and retention.  He hasn’t been shy about defending the need to “celebrate the rewards of success.

In today’s world, every bank will take its turn getting slammed on bonuses.  But they should take pains to avoid being slammed twice.






It’s All Business on the Groupon Investor Call

Three months after its IPO, Groupon reported earnings that were good but not as good as many expected, and the shares tumbled.  You might expect the management team to be rattled and strike a defensive tone on its conference call with investors.  Instead, the call was all business: detailed, candid and orderly.

Groupon CEO Andrew Mason and CFO Jason Child took every question, walked people through the numbers and tempered their optimism with facts. The focus was on the business performance; the stock price was barely mentioned.

That’s a big contrast compared to the technology boom of a dozen years ago.

Groupon’s announcement had none of the things that often were part of a tech company’s earnings in those days.  There was no oddball accounting or incomplete financial data; no hype or hastily arranged new-product launches.  (Ok, there was a bit of fluff around new market openings, but that’s forgivable.)

This rational approach has a lot to do with the experience of Groupon’s board and its senior management, many of them veterans of mature tech companies like Amazon and Google.

But we also can thank the SEC and the discipline that Sarbanes-Oxley brought to the public markets (a point made here by Jesse Eisinger).  The regulatory process forced the company to change certain accounting practices and clarify Mason’s expansive comments in an employee memo that was later leaked to the press.

Groupon has a lot of business challenges, and anyone holding its shares is right to be worried about the sustainability of its growth rate (as Henry Blodget has observed).   But for a newly pubic company, it’s handling investor communications just about right.

Liam McGee needs a communication strategy – fast

Insurance company earnings calls are normally staid affairs. But Hartford Financial Group had a sudden burst of excitement yesterday as its largest shareholder, hedge fund titan John Paulson, joined the call.  He hammered CEO Liam McGee for not being more specific about his plans for increasing shareholder value at the company, which saw its shares sink by 39% last year.

Paulson said:

“I know you’re doing a strategic review but there’s no slide talking what about what the potential would be, just that there’s challenges. Goldman Sachs came out with, I think, a very good analysis a few months ago where they showed this – they estimate the upside to doing a tax free spin-off of P&C could be over 70% of what the current stock price is trading at. Now, I agree that there’s going be challenges but isn’t your job to really overcome those challenges to achieve the maximum value for shareholders? Now, I would say that Hartford needs to do something drastic because the stock is the lowest valuation relative to book value of any major insurance company.”

And later:

“Well, I think you need to do a much better job of explaining that because Goldman’s report is a very good report on a path to separate the business and create what theyestimate as a 70% increase in shareholder value. And then you merely say there’s some obstacles and you don’t equate what the costs are to the benefit and what value do you think could be created. Because right now with the stock performing as poorly as it has relative to both P&C and life companies, I think you need a better explanation of what you’re going to do to enhance shareholder value. Merely that you’re working hard and you’re committed but there’s obstacles. What we need you to do is overcome the obstacles to enhance the valuation for your shareholders. Not merely point out that there’s obstacles.”

McGee handled the confrontation well and didn’t lose his composure, but he’s in a tough spot.  He hasn’t provided details about the strategic review or the scope of what it is considering or conveyed any urgency about it.

He has relied for months on pat phrases to describe his strategy for increasing shareholder value (e.g., “We are aggressively managing the levers we control,” “We do not believe the current stock price reflects the true value of the company”).  That language is fine for a while, but it sounds hollow now.   McGee spoke about the strategic review in general terms at an investor day in early December.  Now, two months later, it’s reasonable for investors to expect him to say more.  He didn’t, and that’s a problem.

McGee needs a communication strategy.  Here are four tips:

  1. Have something to say.   Many CEOs are paralyzed by the fear that they can’t answer to all the questions investors might have.  So they say nothing.  In fact, there’s probably a lot McGee can say about how they’re approaching the review, the resources they’ve enlisted and the broad areas they’re exploring.  Investors would welcome that, and they’ll accept that he can’t answer everything now.  They won’t accept silence.
  2. Be ready to respond.  Like it or not, this is a public process, and McGee needs to be prepared when others weigh in.   For starters, he needs a thorough response to the analysis by Goldman Sachs, which suggested there were significant gains from splitting the life and P&C businesses.  McGee was quick to dismiss the report but offered no specifics.   He ought to say where the study is inaccurate or incomplete.  It’s serious research by a smart analyst who’s respected on the street.  It merits a thoughtful response.
  3. Speak to investors.  If he’s not meeting with investors, he’d better start.  It’s important that he be seen soliciting their views and building relationships.  He’ll need all the goodwill he can get, especially if the turnaround takes longer than expected.
  4. Speak to the press.  McGee has been trying to play it safe with the media, doing little beyond an occasional appearance on CNBC.  That’s a mistake.  He seems to have good communication skills and should put them to use.  A couple of thoughtful interviews in high quality publications would give him a chance to outline his strategy and frame the issues.  Right now, they’re being framed for him.

Having a communication strategy would give McGee a way to discuss the review in a consistent manner.   He surely doesn’t want to tip his hand or lose control of the process, but that’s all the more reason to have a strong plan.

Otherwise, the earnings calls are going to get even tougher.

Communicating European debt risk

As reported today, the US Securities and Exchange Commission has introduced guidance for financial firms related to reporting of their European debt exposure.  The SEC issued its recommendations to address the inconsistent approach firms have used to disclose their risk to sovereign and private borrowers:

“In response to our comments on their disclosure documents, registrants have provided incremental improvements in disclosures of exposures to sovereign debt in several countries during the year. However, we find that expanded and enhanced disclosures are not consistent from registrant to registrant. Therefore, we determined that investors would benefit from our providing additional guidance to assist registrants in their assessment of what information about exposures to European countries they should consider disclosing and how they should disclose this information with the goal of greater clarity and comparability.”

The SEC gives very clear instructions as to the type of information it believes firms should disclose and the form it which it should be presented:

“We believe that disclosures should be provided separately by country, segregated between sovereign and non-sovereign exposures, and by financial statement category, to arrive at gross funded exposure, as appropriate. Registrants should also consider separately providing disclosure of the gross unfunded commitments made. Lastly, we suggest that registrants provide information regarding hedges in order to present an amount of net funded exposure.”

The SEC’s action will likely result in additional disclosures by financial firms in their 2011 annual report (10-K) filings.  It could also produce some surprises for investors and fresh volatility in stock prices for firms whose risks are seen as greater than previously thought.  These firms wiould be well advised to prepare a thorough communication plan for reporting their risk exposure – and not simply leave it to be discovered in the fine print of a regulatory filing.