It should have been the event that breathed new life into the stock market. A giant technology firm lists its shares. Millions of small investors buy into a business that has great growth prospects, and over several years multiply their money many times over. In its wake, dozens of entrepreneurial firms join the public markets. And a generation of private investors discover that backing new businesses is a great way to make money.
Unfortunately, neither Facebook nor the bankers who brought it to market seem to have read the script or had any idea quite how much was riding on this initial public offering (IPO).
The Facebook float has turned into a catastrophe. It may well kill the IPO market stone dead. If there are no more fresh listings, in another decade there may be no stock markets either – at least not in the sense that we have known them for the last hundred years.
The Facebook saga goes from bad to worse. The most hyped new issue since Google joined the market almost a decade ago has seen its shares slide 21% since it listed. Lawsuits are being threatened on all sides. The company has suggested it may quit the Nasdaq market for the main New York exchange as a protest against the technical glitches that contributed to the chaos around early trading in the stock.
Right now, most people would probably rather have some Greek banks and Spanish property companies in their portfolio than Facebook. It could hardly have got off to a worse start.
What went wrong? You can debate whether Facebook is another Amazon or Google (a tech giant that will be around for a long time), or another MySpace (a flash in the pan that will disappear as teenage users discover the next big thing). But it’s too soon to tell. However, what should be clear is that this is a major company with a huge presence around the world and the potential to make a lot of money over many years if it is managed in the right way. The only thing that is really at issue is the price.
It looks as if Facebook was atrociously advised by the Wall Street bankers who brought it to the market. They appear only to have worried about maximising the money made on day one – and no doubt their fees as well – rather than creating a long-term, stable market in the company’s shares.
That was the wrong decision – both for the company, and stock markets more widely. Usually an IPO going off the rails wouldn’t matter very much. But Facebook was not just any old new listing. It was such a high-profile IPO that it is going to influence sentiment for a long time to come.
Already there are signs of other floats being pulled. In America, 29 companies have cancelled their IPO plans since the Facebook debacle. Only 11 companies filed to go public in the US in May, down 66% on last year. Over the whole of 2012, IPOs are down 70% on last year.
The rest of the world is no better. Formula One cancelled its Asian listing. Even the Russian companies that were the only sign of life on the London market are saying ‘nyet’. Who can blame them? The people who bought Facebook shares got roughed up by the market. You can hardy expect them to keep coming back for more of the same punishment.
The trouble is, stock markets around the world were already in bad shape. A 12-year bear market has driven away investors. A mounting pile of regulation has deterred small companies from listing. The rampant greed of senior executives has tarnished the image of quoted companies – shareholders are finally starting to vote against the endless inflation of top management pay, but it may be too late to do anything about. It is hard to see how much more punishment the quoted market can take.
What we are witnessing may well be the start of the decade-long disappearance of the stock market – at least in the way we know these markets right now. After all, stock markets were created as a way of bringing together investors and entrepreneurs – first of all in the coffee houses of Amsterdam and London, and later on in formal bourses.
But the internet is also very good at bringing together buyers and sellers of things – whether it’s second-hand stuff on eBay, or books on Amazon, or music on iTunes. There is no reason why it shouldn’t create markets in company shares as well. It has already become a place for new companies to raise capital. A host of new platforms allow people to invest in start-ups directly in return for equity. As they mature, secondary markets are certain to develop where those shares get traded between buyers and seller.
You might have expected those companies eventually to graduate to a proper stock market. But now? You wouldn’t bet on it. Why not just stay on an informal, web-based market where there are no commissions – and no heavy-handed banks rigging over-priced IPOs.
At some point in the next decade Facebook may well de-list and trade its shares on an online platform instead. At that point the major global bourses – London, Frankfurt, New York and Tokyo – can be declared effectively dead.