Facebook is now trading at $32, $6 below its IPO price. Here’s Matt Taibbi’s take:
A suit has been filed by Facebook shareholders against Mark Zuckerberg, Facebook, Morgan Stanley and others. It’s based on a very simple concept: when internal analysts learned that Facebook’s numbers were going to be worse than expected, the company and its bankers didn’t tell everyone, but just “selectively disclosed” information to a small group of “preferred investors.”
Here’s the often-wrong but sometimes dead-on Robert X. Cringeley:
If you are an IPO company founder and — even more explicitly — you are Facebook CEO Mark Zuckerberg, you want your share price on the first day to go exactly nowhere, which is what Facebook’s did. That means no money was left on the table and the company got the best possible deal. Zuckerberg didn’t and doesn’t care about investors in this scenario, but then neither does he wish them ill. He just doesn’t give a damn.
And there’s the difference because investment bankers do give a damn because they’d like to have another IPO next week or next month and have that go very well, too. Zuckerberg expects Facebook to never issue another share of stock. He’s done raising money thanks, and on his honeymoon.
These two views aren’t inconsistent. The difference between Zuckerberg and your average strike-it-rich nerd (like, say, Sergey Brin and Larry Page of Google) is that Zuckerberg is totally ruthless and seemingly uninterested in the usual nerd pursuits. Page and Brin’s concern with their IPO was to take the focus off of quarter-by-quarter performance and their prospectus reflected that. It’s a document that shows that they wanted to stay kings of the nerd palace as long as possible. As far as I can tell, Zuckerberg just wanted to cash in. So he’s happy to fuck small investors as long as he got the highest possible price for his shares. I wouldn’t be surprised to see him leave the company in the next few years.
There’s nothing wrong with not giving a damn about the investors. What Facebook did was to care about some insider investors. Had everyone been treated the same, then Cringeley would be right: the shares were priced at the perfect point to sell them.
Gosh, do you suppose Zuckerberg is a potential Romney voter?
Setting aside the privacy issues for a few seconds, I really hope Facebook stock tanks hard. Not that I want Z and his friends to make out like bandits, but this is a company that sells its users, literally. They make NOTHING of real value. Say what you will about Oracle, Apple, MS, and Red Hat Linux – at least those companies have products and services they create and sell, that people think are worth buying.
@MikeJ: I agree. The real crime is the “selectively disclosed” information. Screwing people over is how you make money on Wall Street. There are just suppose to be rules that have to be followed before you screw them over.
A few years ago I would have thought this kind of thing never happened but it probably happens every day.
Do you expect the Zuck to move to Indonesia?
But if you look at the nature of the people we credit with great technical achievements because their companies revolutionized technology – I’ll point out Edison, Jobs and Gates as prime examples – none of them were actually the geniuses behind the products they are credited with. The actual hard work was done by others. What they were good at what mercilessly driving the real geniuses, taking credit for their work & steamrolling anyone with even a hint of a chance to compete. To put a fine point on it, cut throat businessmen.
Just another way how Wall Street fucks itself in the long run by demonstrating yet again to the 99% that it’s all rigged. The only big pot left for them to run their con on is Social Security.
The Republic of Stupidity
Perhaps the name of the company should be changed to Faceplant…
I’d also like to know when Linkedin’s P/E ratio is going to heed the call of gravity and come back down to Earth… the folks behind Linkedin might be fine upstanding characters, but NO company is worth 600 times its earnings per share…
The next few years? How about the next few weeks or months?
@TomG: I pretty much agree. One thing Facebook does provide is a very low-friction way of setting up a group with a common interest, but is that worth $100 billion?
@MikeJ: I think Cringeley is right that Zuckerberg wanted to price the IPO so that the shares did nothing on the first day, and Taibbi is right that Z accomplished his goal by hiding earnings from small investors.
The Republic of Stupidity
Not to mention appropriate etiquette the morning after, like leaving a respectable amount of money on the nightstand before exiting…
c u n d gulag
Leave the company?
Not until he’s bled it of every nickel – from somewhere off shore.
Or, maybe he’ll build “Face Island,” a floating Libertarian island, where he’ll be “Lord of the Flies.”
I hope someone swats that greedy, sociopathic motherfecker!
Belafon (formerly anonevent)
@TomG: Yes, their product is eyeballs for advertisers, but we’ve seen this medium before, it’s called television. Now, you could make an argument that TV has not produced anything useful either, but I think you’ll have a hard time convincing people of that. What Facebook did do was give people a central place on the internet to hang out and talk to others.
I must admit this law suit strikes me as a “Captain Reynaud” moment in “Rick’s Cafe Americain.” Perhaps I just read the right blogs on this stuff (“The Big Picture,” “Economist’s View,” “Calculated Risk” “Jesse’s Cafe Americain,”) , but I thought any reasonable investor would know that there was a good chance for the Facebook stock to to tank (a capitalization of 100 billion with revenues of $4 billion is a pretty high price to earnings ratio, especially with the whole market trading down to a Bear Market 12-1 ratio). Even the usual flaks on CNBC were a bit skeptical in the run up. Finally, with all IPOs, I remember that insiders, with far more knowledge about the firm than I, are selling, so why should I be buying?
Just think about how many people would have used their privatized Social Security Funds to buy this stock…then, think of what you would be hearing the TV. Fast forward 12 months and that is what you will see if the GOP wins big in November. Thus, we may be that Lord of the Flies locale so Zuckerberg wont have to go anywhere.
Insiders sell at IPO time because they’ve been working for less than their true market value in order to get stock that they could sell. Now is when they finally get paid for the 90 hour weeks and sleeping under their desks.
Sorry, but if you think FB is worth more than Visa or Disney, then you deserve to get fucked. You were too dumb to have that money in the first place.
I mean, really… All this talk of monetizing FB like Google is complete B.S. When I search for something on Google (or Amazon), I’m searching for something. When I write a post about an old lady driving a BMW on FB, that does not mean I want to go out and by a beemer.
The whole promise of FB as some sort of marketing revolution is bunk. I don’t care if you know everything from my dog’s name to my shoe size, there is simply no better way to “target” customers than giving them exactly what they’re asking for.
The Republic of Stupidity
And in Faceplant’s case, wasn’t there an unusually high number of insiders rushing to sell on the first day?
The question is, does this mark the beginning of the end of Facebook as the dominant social media force and its beginning as just another identity service for blog comments?
I’m not quite convinced that this is an issue. If you bought because the press was excited about the shares, then your loss is your loss. The revised revenue and earnings outlook was published in the proper SEC disclosure. If the analysts were giving a different story than the underwriters, isn’t everything working properly?
The Republic of Stupidity
Aren’t employees – the ones working the 90 hr weeks – in a lock up period for months to come?
I was under the impression the ‘insiders’ selling right off the bat were the investor types… the so-called ‘angels’…
Anyone with a second grade education and one working hemisphere inside their brain knows that IPOs are rigged to the max, and that the powerball lottery is a better bet to get rich for the Average Joe. Once you hear about an IPO in the news, the game has already been over for a while.
This time, though, the naifs in the market had the added assistance of GM dropping a huge turd in the punch bowl just a few days before the IPO. If that didn’t make you think twice about Zuckerberg’s magic beans, there’s no hope for you.
@The Republic of Stupidity: Usually. That was the experience I had with my own company’s IPO. And within a year lockup, it managed to lose half it’s value. I call that a “learning experience” at this point.
Odie Hugh Manatee
There’s a sucker born every day and ‘products’ like Facebook are a magnet for them.
I plan to siphon all my mobile upload photos off of facebook over the next few weeks, in anticipation of the inevitable corporate malfeasance which will now drive facebook into the ground.
Disagree about Edison. He truly was an inventor and creator. By no means just a businessman.
@The Republic of Stupidity: I don’t know how much IPOs have changed since I was at an IPOing co, but the lockout (at least the ones we got) wasn’t a hard lockout. Rather, it was just the capital gains tax. If you get an option grant, it’s just an option to buy at a price different than the final price; however, if you exercise the options on day 1, you pay 35% cap gains, since you’ve only had the stocks for a day (regardless of how long you had the option). If you want to only pay 20% (or whatever it is now), you hold on to the exercised stocks for a year before selling.
So, if the Facebook deal is similar to the one I went through, they can sell immediately, but they just lost out on (potentially) lots of money in cap gains taxes not paid. Of course, with FB, the longer things go, there’s also the risk of sale price approaching option price, so they could also lose out purely on capital gains.
EDIT: Now that I think about it, though, I *do* think that company officers were legally prevented from selling for some smaller period of time due to issues around insider info (they often can’t sell around material events). Maybe someone else can clarify/correct?
Gin & Tonic
Misses the point completely. The best way to “target” customers is to create something they didn’t know they wanted and make them want it. Nobody was asking for iPods.
Demand doesn’t exist in anf of itself. It has to be created.
Another bubble would be nice though. Needs more pets.com.
@Gin & Tonic: If I first heard of the iPod on FB, I’d say you have a point.
Additionally, if creating demand is the whole story, why do I see mop, toothpaste, and food commercials every time I turn on the TV? The largest portion of marketing is fulfilling existing demand.
Q: What was different about the Facebook IPO? The insider-only information?
A: Nope. NASDAQ had technical difficulties which limited the pop and restricted the ability of the insiders to profit from the retail investors (mom, pop and the grandparents.)
Which is to say, from main street’s perspective, this went pretty well. It was a disaster for wall street. All that potential fuckage, wasted!
The Republic of Stupidity
(right at the bottom of the article…)
240MM shared @ $30/share is something like $7BB taken out by the early investors… and that’s a low ball estimate on my part…
It also means they – Faceplant and the angels – tried to sell over 400 million shares on the first day…
When invested pensions become a thing of the past, what will Wall Street use for their monopoly money? Are public pensions allowed to gamble through hedgefunds? At one time, I believe public pensions were pretty restricted, riskwise. Of course, bond ratings are shaky nowadays, so I don’t know what they can use. Private union pensions can be in hedgefunds, I know.
I’ve read that union pensions in Europe are investing in renewable utilities for steady growth, rather than casino gambling. A side benefit is the investment in green tech.
When will American wise up?
QFT. Keep in mind, everyone, that the people suing aren’t doing it because the shares tanked (although that’s likely what prompted them to take a closer look into the matter). It’s the inside information angle. As we’ve seen in the past few years, there aren’t nearly enough regulations on Wall Street, but this is one. Everyone, by law, must be given the same information. If there really was “selective” disclosure happening, the people involved are liable.
Facebook has successfully embedded itself deeply into the social fabric of a huge portion of teens and twenty-somethings, even if it’s a more tangential pastime for most of its older users. This is indeed an indisputable indicator that it has created something of “real” value, even though its structure is riddled with commercially predatory practices with regard to respect for user privacy.
THE REAL PROBLEM with social networking apps such as Facebook and Twitter is: if you can’t figure out what the app’s commercial product is…then YOU are the commercial product being sold by the app’s business plan. The predatory behavior toward user privacy is built-in to any app that needs to harvest and sell user’s profiles to make money, and Facebook is the epitome of a product that has literally NOTHING to sell to anyone for revenue except for its user’s profile information.
@redshirt: Oh yes, I will love going to Facebook Arena. Some cash-strapped city needs to make that happen.
I may be beating this to death, but dday points out that this kind of thing is the INTENT of the JOBS law.
Gin & Tonic
@jrg: I never said creating demand is the whole story, but there’s real money in that. Fulfilling existing demand will always be with us, but creating new demand will be more profitable.
Since you mention mops, where did the “Swiffer” product come from? Was that satisfaction of pent-up demand? No, that was a product created and sold into a space where perfectly satisfactory solutions have existed for centuries. People have had a way of cleaning their kitchen floor for a long time.
@jayackroyd: Yep. Didn’t take long for the DFH’s predictions to come true.
The Congressional hearings are stagecraft to talk public indignation to death.
And why is my previous comment in moderation?
@cmorenc: I thought that was pretty much what I had said. Or were the 4 examples I provided as contrast not clear enough?
am I the only one who doesn’t care about Facebook’s price share?
From my point of view, outside of the Market, the best part of the whole kerfuffle was the headline from somewhere, “Nobody Likes Facebook.”
And the Luddite within thinks we should just forget the bums and move on.
Zuck may be ruthless, but he’s not going anywhere anytime soon — instead, he’s put measures in place to make sure that he retains total control of the company no matter what the holders of public stock have to say about it. There are two classes of stock: the publicly traded class A shares have much less voting rights than privately held class B. Zuck, of course, owns a lot of class B, and he has irrevocable proxies to vote class B shares held by other insiders, giving him personally more than 50% voting rights. He can do whatever he wants, and no other shareholder has anything to say about it. Which is why it’s perfectly legal for him to, say, negotiate the $1 billion Instagram purchase personally, and let the Board of Directors know in a courtesy call afterwards.
By the way, he did release a “letter to investors” which said, among other things, that profit is a means to an end, and the end is better social products. Which is to say, he said explicitly that the purpose of the companyy is to let him try to reshape society, and the company is ultimately focused on those social goals more than on the bottom line. At least so long as Zuck retains control — which will be as long as he likes. (If you’re looking for hints about the length of his planning horizon, he’s also made sure his heirs will retain his exclusive control so long as they want it.)
So, why go public at all? Primarily to let employees cash out their stock options — but thereby hangs the one way that this might cause problems for him long-term. If the stock price keeps going down, or stays stagnant, new employee stock options won’t be worth very much. (The usual arrangement is that employees get to buy at the price as of the day they were hired, and sell at the current market price. If the price has gone up since they were hired, this can be very valuable. If it has gone down, not so much.)
@rikyrah: +1. Never cared for the product either.
@Gin & Tonic: Swiffer did not create demand for a product that cleans the floor any more than the Doritos Taco Bell taco shell created demand for food.
My point is, if I go to Amazon and search for “mop”, swiffer comes up… It is a type of mop. You don’t have to make an guess about my needing a swiffer based on demographic information if I’m telling you I need a mop.
I get the marketing info that you get from FB but I just don’t see it being of anywhere close to the value of Google. And furthermore, I understand marketing is important but its still not a J and J, MS, Apple, 3M whatever. I don’t see them ever getting people to subscribe to it, even if it’s five bucks a month. I remember being in Salon’s TT and they asked for 5 bucks a month and jeebus, you would have thought they asked for fifty bucks a month. People dropped out all over the place over five measly dollars a month.
Facebook was a forced IPO because of increased SEC scrutiny. Zuckerberg never wanted to go public.
The conclusion that he wanted to cash in doesn’t really have a basis in reality.
That’s because companies have a habit of starting with a small ($1 or $5) fee, then cranking it up to $15 or $20 once they have your billing info.
I’m personally less likely to sign up for a service if they’re going to charge me less than $10/month, because I figure it’s a scam. More that $10/month means they have more to lose if they start fucking with me.
The Republic of Stupidity
First time I looked at the details of the JOBS law closer, I damn near fell off my chair laughing…
We’re entering a magical, golden age of the Really Big Internet Hustle… as if the last ten years weren’t bad enough… Nigerian princes weep with envy…
If you take the semi-mythologizing story of it’s creation, then it was created when marketing/product development actually went and watched people mop and came to the realization that people spent more time wringing out mops, trying to get the dirt out of them, instead of mopping floors. Corporate ethnography essentially. The fact that it’s essentially replaced mops in homes should show that it restructured an existing market.
I don’t understand the Facebook hate. This isn’t like Windows, where every computer needs to have it and those that don’t have it are virtually incompatible with every other OS.
People use Facebook because they enjoy using Facebook. It’s free – and you don’t get much more egalitarian than that. Yeah, the site collects your info and sells it. But so do credit card companies and employment firms and anyone else that can get hooks into your data.
I think $38/share is overpriced, but I might pick some up if the stock drifts down into the $20-25/share range. It’s a useful web tool, its fairly easy to use, and it has demonstrated some impressive growth potential.
Setting aside the issues of insider trading (no small thing, but not really relevant to the “Facebook website sucks!” conversation) there’s really nothing to be particularly upset at Facebook over. If Facebook was really so toxic and obnoxious, I think less people would use it.
@redshirt: Pets.com was actually a good idea for a viable company. I placed several orders.
Unfortunately, their warehouse didn’t function. I ordered cat litter (why lug it home from the store?) and received aquarium supplies.
@The Republic of Stupidity:
I was surprised Taibbi didn’t make this connection….
the swiffer was basically the mop/sweeper for the ‘everything is disposable’ generation. what’s funny is, i’m surprised it came out as late as it did. certainly it restructured the market for mops.
I see this as completely inaccurate. If you look at the structure of his holdings it’s clear he intends to control the company for quite some time. And if you consider the different deals he’s put in place and how he approached them, like wearing a tie for the government interaction on FB, IMO it looks like he wants to be King.
yeah, zuck is a control freak. he’s not walking away.
@JoyfulA: I agree, it was actually pretty solid. It’s just become shorthand for INTERNET BUBBLE.
Twitter….as if there weren’t enough morans to rubberneck with on the intertubes already.
You want into that pile on? More power to you but as a medium of communication it sucks. To me it’s more an electronic version of holding up a sign while standing on a soap box on some corner.
Facebook is a classic case of a monopoly stemming from network effects.
FDL also has a point that with the new JOBS act, IPOs will definitely be where all the Wall Stree Grifters will trying to separate average joe (ro the average pension fund), from his and her money. What a truly horrorific piece of legislation and passed and signed simply because Democrats became terrified of the Frank Luntz title stuck to it and the desire to harvest campaign donors from Silicon Valley.
You still get network effects. I don’t want to sign up, because of the privacy bullshit and so forth. But everyone I know is signed up, so signing up with a competing service would be pointless.
That can’t be right, because that’s an implicit slander of Obama.
@Charlie Dodgson: no FB had to go public by SEC regulations, once it had doled out equity to a threshold number of people.
IPO’s usually drop from their initial offering price, but that usually takes a few months to year and not one week.
You’re out of your mind, mistermix. Just because Zuckerberg doesn’t give a damn about INVESTORS doesn’t mean he doesn’t give a damn about the COMPANY.
Why else would he orchestrate total control over the company? So he can just up and leave it in a few years, or months, or days? I don’t think so.
No big deal. If you have an itch to jump on e-Trade or whatever and buy IPO shares DON’T!
Succinct summary of IPO’s at the link. The conclusion is why I think the hype about the jobs act thing should be irrelevant, IPO’s are not about “getting in at the bottom floor” of a company. It’s a price meant to lure investors, so the people floating the shares can make money.
Unless you plan to buy shares at the start of trading and flip them fast, there’s no inherent benefit for a small investor to buy a company at the IPO price.
Hopefully folks will realize this now.
There was a very good piece in the Atlantic yesterday on this, but I iz too tired to link.
The Republic of Stupidity
There… better… no?
The Other Chuck
Google had a massive advertising network during a period of immense growth online. Everyone with a google adword box was an affiliate, everyone was going through google. They had an empire before they even bought Doubleclick.
Facebook … is a website. Yes their “like” button is ubiquitous, but you’ll also note it usually sits beside a half dozen other buttons. Facebook is huge, but hell, I think Cheezburger has more diverse properties than Facebook.
Ideally you don’t want a big pop on an IPO. That would mean that the underwriters undervalued the company and that money was left on the table. That’s fine, since going public is supposed to be about getting fair value for the portion of the company that is being sold to the public.
What you really don’t want though (at least in theory) is for the stock price to start dropping hard after the IPO buzz wears off. That means that you boned a whole bunch of people and that your valuations were chock full of derp. Not that the street or the company that just went public really care, but being able to raise funds by going public is important for a lot of companies starting off, and IPOs that tank make it harder for other companies to raise cash.
I’m always amazed when folks like him stay in past the first hundred million or billion or whatever. The only reason to stay is because they like being master of the universe, and it’s interesting that there aren’t more people like Elon Musk who cash out saying, “If I’m really all that I can do it again.”
@jrg: You’re forgetting something. Sure, you may not have been steered to a Swiffer, but when you select it, underneath pops up a whole host of products that “other people purchased”. You might not, but how many others say “Oh, I could use that too.”. And, your purchasing habits are stored. Do you think Amazon couldn’t use your purchasing history to steer you to certain products?
@mai naem: There is a lot of marketing that happens with FB. When I get my car fixed and it’s done by nice people with fair prices, FB learns about it. When my friend started up his motorcycle shop and I passed it on, FB learns about it. It isn’t all direct marketing. Hell, we’re the marketing employees; we just don’t get paid.
There’s that awesome example of that idiot founder at Yahoo who refused to allow Microshaft to buy them up.
People are talking about how it lost 15% so far? I wouldn’t be surprised if it ends up trading at less than 50% of the IPO price. A lot of the stocks were bought by the banks on the first day, and they just haven’t found enough suckers to offload them to.
As someone who works in Silicon Valley (for a company that builds real things that are sold in boxes) and would like to move up from his crappy rental, I’d appreciate a total bubble popping meltdown to happen in, say, six months from now.
Not quite. What the SEC actually mandates at the 500-shareholder point is the disclosures that are (I believe) the expensive part of going public, at which point almost everybody does a public offering because at least that way, they gain rather than lose money for their trouble. But it’s not actually mandatory; it would be possible to stay privately held.
In any case, they could have continued the games they were playing to keep the nominal number of shareholders under 500 for some time longer: holders of options don’t count, so long as they don’t hold actual shares. But that requires them not to exercise their options… which, past a certain point, gets ridiculous. People at a successful Silicon Valley company expect to exercise their options, and, more importantly, make money on the shares — which effectively requires them to be publicly listed. As Zuck himself said in 2010, “We’re going to go public eventually because that’s the contract we have with our investors and our employees.” Violation of which would have been punished directly by a massive employee exodus. But if it wasn’t for that, he could (and likely would) have found a way to finesse things with the SEC.
@Calouste: People are talking about how it lost 15% so far?
Yeah; it’s an indication that it was relatively well priced at first. The market’s dropped a bit in the same period as well, so it’s not even that bad. The biggest difference I see is that folks with actual equity are being rewarded this time rather than folks with the connections needed to get it on the IPO.
IPOs have been in the toilet for the last 10 years. The activity is in Mergers and Acquisitions. The big companies have more than enough money to skim the cream (See: Siri) of new companies with a fer-real product, product line, or patent portfolio, management follows developments in their market because they’re toast if they don’t (see: Motorola and Nokia,) and selling a company privately is a hell of a lot less time, hassle, and paperwork than an IPO.
@sherparick: If middle class joe schmuck hasn’t learned after a real estate housing crash, dot com crash, 9/11 crash, Enron crash, and the financial derivatives crash in the past 15 years to not throw his money after every hot thing he reads about in the paper, I can’t really feel sorry for joe. He is actually earning his name.
Jay in Oregon
That would be nice, but there are people who earnestly think that cutting taxes will raise revenue, and cutting back on spending grows an economy.
It reminds me of the unnamed Amazon executive who once said “Yes, we lose money on every sale, but we’ll make it up in volume.”
Thanks for the link. I’ve been meaning to find a good one to explain IPOs.