NASDAQ’s Gamble With Facebook’s Fortune

NASDAQ had a choice. When its systems buckled under the titanic volume of Facebook IPO share orders, it could have pushed back trading a day, or at least recommended as much to Mark Zuckerberg and company.

But as the IPO's scheduled time passed, NASDAQ made a cavalier decision to stumble forth on broken legs, pretending like little was wrong rather than halt trading as brokers asked. There seemed to be no plan for if things went wrong. An error-filled day of trading ensued, and confused investors pulled back. Financials aside, public perception is important for a public company. And when Facebook's share price sunk, public perception went down with it.

In some ways, Facebook's IPO was no disaster. It successfully raised $16 billion and didn't leave a quick pay-day for the banks. Perhaps its share price would have fallen even if NASDAQ had upheld its end of the bargain. There are plenty of questions about Facebook's revenue model, reports of a weak second quarter, and a reduced estimate from Morgan Stanley analysts that all contributed to the slumping price.

But beyond Facebook's actual value and who else is to blame, NASDAQ's bungling of its IPO hurt the company's image.

Facebook has received plenty of black eyes over the years. There's the controversy about its inception, fueled by the The Social Network's dramatization and the heartless depiction of Zuckerberg. There's also the privacy flare-ups. Some were executed and explained poorly. Others saw Facebook pushing changes and features people would eventually accept or even enjoy, but before they were ready. Most recently, revenue per quarter slipped a bit in Q1 2012.

With nearly a billion users, Facebook had built up momentum, though. The world had grown to accept that Zuckerberg didn't have to invent the concept of social networking to have invented Facebook, the realization of that concept. It had emerged from privacy audits by the Federal Trade Commission and the European Union's Irish Data Protection Commissioner without being required to make significant modifications that would hamper its business. And it was finally starting to monetize mobile.

But the bullet train was derailed in part by NASDAQ's mangled tracks, and the name on the crashed stock was $FB. Justifying a $104 billion valuation was going to be tough enough. Impossible by some assessments, just a matter of time by others. The decline of Facebook's share price certainly wasn't all NASDAQ's fault. But understanding of the intricacies of its specific failure won't trickle down all the way either.

Now the average person who was a Facebook user and wanted to become a Facebook owner is spooked. They wonder if some unseen competitor or critical flaw in its business would lead to such a sell-off the morning of the IPO. Zuckerberg could have courted them by underpricing Facebook's stock, handing billions to the banks in exchange for a pop. Instead he planned to maximize the money raised, fuel for the long fight with Google.

But he probably didn't plan for a trading delay of 30 minutes and investors who were unsure how much of Facebook they'd bought. Or for 12 millions postponed share orders to suddenly be filled between 1:49 pm and 1:51 pm without being properly marked "late sale", exaggerating the impression that people were trying to sell, as Reuters' Rodrigo Campos and John McCrank explain in their excellent minute by minute account of the IPO.

By trading volume, Facebook's IPO would be the biggest in history with 576 million shares exchanging hands. There was no precedent to go by. NASDAQ could have admitted its software was unprepared, attempted to halt trading until its systems were sound, and accepted the blow to its reputation. It could have given Facebook a fair chance. Instead, with Facebook's money on the line, it rolled the dice hoping everything would be okay. It wasn't. Now both are worse are off.

The sunny Friday of Facebook's IPO started gleefully with a words of thanks from Mark Zuckerberg. He'd then receive a commemorative hoodie from NASDAQ'S CEO Bob Greifeld who was soon cheering and fist-pumping as Zuck hit the opening bell. With hype at fever pitch and orders piling up, maybe he should have been managing his exchange instead, or at least had a Facebook-approved game plan in place in case of a delay. It'd be no surprise if Facebook considered a switch to the NYSE.

Not everyone will remember NASDAQ's gamble, but the black spot left by the chaos of May 18th will be part of Facebook's image as long as the social graph lives. Other companies picking an exchange for their IPO should be the last to forget.

[Image Credit: Tut Factory Montgomery Advisor]