Ethics of Goldman handling Facebook IPO

GOB's picture
Rank: Senior Orangutan | 417

Today I read the NY Times dealbook article comparing Zuckerberg to how Gates was pre-IPO and how similar they seem. One possible to be similarity is using Goldman as an IPO bookrunner. It's well documented that Goldman has invested $450 million in Facebook at a $50 billion valuation. So is it just me or is Goldman 1st) annuncing a valuation, thus setting a standard for future valuations, unethical and 2) should Goldman even be allowed to be te bookrunner?? Honestly how is this legal? Moral hazard much?

Comments (10)

Jan 8, 2011

goldman = bunch of greedy crooks

Jan 8, 2011
hopeful_banker1125:

goldman = bunch of greedy crooks

You must be new here.

Jan 8, 2011

They're doing it as an end run around the SEC's 500 investor limit on firms without public disclosure. A limit in place specifically to prevent speculation and opacity in earnings reports, and an opacity that Goldman is using to fuel the fire.

Fuck Goldman.

Jan 8, 2011

Let me translate what hopeful is trying to say:

"Goldman Sachs bankers are intelligent and hard-working, thus finding themselves in solid positions on a vast array of investment opportunities. I wish I were a GS banker!"

Jan 8, 2011

Still don't see an IPO happening for a while. I may be wrong, but it would be very inconsistent with Zuckerburg's vision and message.

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Jan 8, 2011
GOB:

Today I read the NY Times dealbook article comparing Zuckerberg to how Gates was pre-IPO and how similar they seem. One possible to be similarity is using Goldman as an IPO bookrunner. It's well documented that Goldman has invested $450 million in Facebook at a $50 billion valuation. So is it just me or is Goldman 1st) annuncing a valuation, thus setting a standard for future valuations, unethical and 2) should Goldman even be allowed to be te bookrunner?? Honestly how is this legal? Moral hazard much?

Like the authors of Freaknomics, I firmly believe that incentives power behavior. Howveer, like the freakonomics examples, you should really ask yourself what the incentives are here, because they may not be what you think - and that causes you to make bad assumptions that lead to bad outcomes.

What you seem to be arguing is that as an investor, Goldman should not be allowed to underwrite an IPO for Facebook. Why? Just because they're an investment bank? As you embark on your career, I encourage you to learn to be precise, both in your thinking and your language.

Have you considered what it is that an underwriter actually does? Why is one actually necessary (not wise, as in getting the best execution through experience and relationships, but actually NEEDED to sell the shares)? And if an underwriter isn't necessary, are you arguing that an investor should never be allowed to sell his shares directly or on the behalf of fellow investors, but that an independent broker MUST be hired? Because that's what your argument implies.

However, let's get back to the idea of incentives. What is Goldman's incentive? They almost certainly will not be able to sell in the IPO. And far from your idea that Goldman will "set" the price, they will not (no more than can any investor in facebook). You seem worried that they can unethically use their position to maximize their profit by goosing the IPO price.

Howevver, they cannot overprice a deal and get it done. They can only suggest a basis for valuation, but they will HAVE to price Facebook based upon what a willing buyer will pay. Given that I've probably seen more tech/internet IPOs than you have, I can say that I frankly doubt there will be a lack of [irrationally] willing buyers.

To increase or decrease aftermarket demand, Goldman can either price efficiently or at a significant discount to the efficient price. So will they maximize the IPO price up to the limit of market demand (something that would hardly be unethical, by the way - just a smart seller)?

Let's go back to incentives. Goldman, like the other investors, WILL ALMOST CERTAINLY NOT BE SELLING SHAREHOLDERS IN AN IPO. So they'll be holders. For at least six months. By then, the market will have fully equalized the trading, and the IPO price will not reflect anything like what the sellers will be able to realize. In fact, the incentive for Goldman and the other investors is to underprice the IPO. It shortchanges the company a little in terms of cash proceeds (which neither the company or the investors care about that much), but it will help create momentum in the stock as the price skyrockets a la Netscape.

Jan 8, 2011

It'll be a bookrun IPO, which means sophisticated institutional investors will have the opportunity to choose what they're willing to pay within a range set by Goldman, Facebook and a plethora of other banks. I have no sympathy for fund managers etc. who [email protected] about things like this after the fact seeing as they usually have better access to information on the company than retail investors and are given the opportunity to state how much they'd invest at different levels within the range (and sounded out pre-range setting, which means they effectively help set the range).

Jan 8, 2011

that sounds right to me (Genghis+Genesis)

Jan 8, 2011

I think you misread the article.

I read that earlier this morning and, to me, it was saying the ethical issue was that Goldman's Private Equity group had turned down the deal that they then recommended to their PW clients. It's not as much of an ethical issue that they had invested in Facebook themselves -- just the fact that they deemed it not good enough for themselves but were rec'ing the investment to others.

Seems like people trying their hardest to ping Goldman Sachs for SOMETHING... it'll blow over.

"You've got to belong to it."

Jan 8, 2011
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