The Facebook IPO – Act One

Be-fitting an internet giant (?), that is, at its core, a One Act Pony.

I must confess, I get a certain chilling-rush from adding that question mark next to "internet giant".  Each time I have seen any business entity being singled out at as a giant (in any field), I start yet another one of my countdown clocks, waiting for the inevitable obituaries, and the post mortems. Yahoo is a prime example.  Planet Earth is littered with the digital graveyards of many young, and ambitious, technology start-ups, and of many old-world corporations that spurned their buttoned down old-worlds in favor of more glamorous digital pursuits (likely to have been recommended by some twenty-something-newly-minted-Ivy-League-MBA-Willy, working for the likes of McKinsey, Bain, or Booz Allan Hamilton, etc.).  Billions have been thrown down such digital drains, and thousands of jobs destroyed, all in pursuit of gravity-defying-stock-valuations that also happen to stuff CEO pockets with absurd amounts of Greenbacks.  Outsized CEO compensation, often disregarding final outcomes, and premature vesting distorts all motivations.  Vulture Attorney (yes, they exist) guard the grounds of dying or dead corporations, and serve as grave keepers, seeking to feed off of any remaining signs of financial upside. Sorrowful individual investors vicariously place flowers at the grave markers, over beers and feelings of despair, or perhaps financial ruin.

To be fair, some businesses do make it to land of giants - Google stands out in recent history.

Contemporary media experts, and talking head media Pundits, are always quick to pass judgment and pin labels,   of grandeur, or of being fatally flawed – on everything that is worth yet another Nielsen ratings point.  Such is life - nonchalant use of mighty metaphors to create headline scintillation is nothing new, but it seems to have run absurdly amok, particularly given the fierce inter-and- intra-media battles for ratings, and the advertising spend that follows from ratings (print media is pressing for survival, broadcast media is screaming at amped up decibels, from every antenna top, and digital media is desperately trying to firmly plants its network circuitry – all to catch our collective dysfunctional attention spans).

Most recently, Facebook was THE golden prodigy, and a media darling (current status of love affair is more ‘Like’ between dislike and despair).  With a global thundering herd of 900 million plus users (Zuck’s Ducks, sitting or otherwise), sending billions of ‘Like’(s), uploading a billion pictures each day, and 400 million MUA (monthly Unique Active accounts - read Facebook addicts).  Imagine this - if everyone now on Facebook became friends with all other FB users, there would be 405,450,000,000 friendships in the FB universe.  That is 405.45 billion, or roughly 62 times the human population.  Stretch that a bit, and you get to some rather amazing conclusions – friends usually do not fight, or kill each other (am I being too naïve?).  So FB creates a platform for global peace and quiet. No more wars, suffering, genocide, etc.  Mark Zuckerberg may even get one of those Nobel Peace Prize nomination nods!

Yes, Facebook has a stunning global retail reach.  At least in theory it does.  And, it will always be free for users – per the statement on facebook.com.  The average user (MUA, or not) pays nothing for having a personal social broadcast platform (the grand design is rooted in psychological theories of human condition, to massage our individual and collective egos, feed our narcissistic needs, and to combat human feelings of isolation and loneliness).  FB has also built out a very impressive technology stack, spread around the World that makes the lives of anxious users, and their friends, a bit more manageable.  Instantaneous ‘Status Updates”, and real-time feedback – ‘Likes’ or comments for every post. 

Corporate advertisers of all inclinations were drooling at the prospect of serving up custom advertising, based on Big Data’s insights from users’ profiles, Likes and posts, and just about everything a user does on FB.  With the right mix of media-hype, and some shrewd calculated feature releases, Mark Zuckerberg and Co. managed to fool Ad buyers into believing that “If You Put Your Product on FB Pages, You Will Sell More”.  But in the Attention Deficit Disordered Narcissistic world of the Average FB user (and, on average, we are all average), the FB community’s quest, perhaps even the need, for ‘Likes’ from fellow FB community members is far greater than the desire to visit a clickable link from some annoying advertiser.  GM pulled the plug on its $10 million annual advertising experiment from FB, saying FB does not help sell more cars, or help in upselling GM cars.  FB even tried to offer low-cost ‘sponsored’ status updates to users – for only $2 a pop, users can have a custom framed and attention grabbing bling surround your status updates.  Was this an ultimate play to our psyche, or a desperate reach for revenues? I believe the latter.

Of Crooks, Cooks and the Retarded

About a year ago, FB retained the band of “Cooks, Crooks and the Retarded” - in strict compliance with Americans with Disabilities Act - to manage its IPO.  Rumor is that Zuckerberg was initially against the IPO, but gave in, despite his staggering 59% voting control of FB (with only a 29% equity stake – how that can happen is yet another story to be told some other time), to the ‘exit strategy’ wishes of his institutional Early stage Venture Investors (read, Vulture Investors, Hedge Funds, Accel Partners, Goldman Sachs, etc.).

The CCR band (Crooks, Cooks and Retards), not to be confused with the band Credence Clearwater Revival, between them had a stunning track record for developing Cooking Recipes, and for Digging their own graves, particularly in recent times.  Getting high on your own supply (don’t, said Tony Montana) became norm, and global markets were brought to their knees, the world on the brink of disaster, paying for the misdeeds of the CCR by way of global government sponsored bailouts.  ‘Free’ Market ‘Capitalism’ at its best.  I get it.

I have no evidence for ANY unlawful behavior (really, I do not!) but somehow adding a C (Crooks) to CR makes for a much attractive moniker.  You see, even your truly is not immune from fondness for bling, and cheap thrills!

After a year of ‘Analysis’ and ‘Valuation’ models, probably running on late night coffee runs and stale pizza (NOT!), Wall Street was ready for the IPO roadshow – the one-on-one, and group meetings, with potential IPO investors. Zuckerberg is said to have attended ONE such meeting, petulant behavior, presumably to show his disdain for going public.  No one can touch Zucky, for he owns over 50% of voting rights! So, Zucky can do whatever the hell Zucky wants to.  But I digress.  After all the Analysis, Valuation Models, and fiduciary responsibility (across both sides of the fence) that was, CCR’s burden, Facebook IPO road show was pitching roughly 335 million shares at between 28 and 34 USD. IPOs are typically not directly marketed to retail investors.  A retail investor can place a buy at the IPO, but is at the sheer mercy of the Wall Street “Allocation” process.  No one really knows how allocation works.  Well, we actually do, but the dirt is too sordid to even discuss.  Getting in on a “Hot” IPO is a privilege because IPOs are usually based on conservative valuation and pricing assumptions.  As investors, who did not receive allocations to their liking, jump in with buy orders, the stock usually pops.  First day trading gains of 25-100% are not uncommon.  A direct implication of such a pop in stock price – the company issuing stock left a lot of money on the table, courtesy of its CCR.  CCRs also, usually, have an overallotment option (for some reason, it is also called the Green Shoe option), that gives CCR the option (right, but not the obligation) to purchase up to certain % of shares issued in the IPO, at the IPO price, and sell the same at market prices.  Think about it – I can but at IPO price, and sell at the IPO plus Pop price, without having to pay anything.  It is Pure Profit, but only if the stock price shoots UP.  The rhetorical argument in favor of overallotment is “market stabilization”, but it is mostly that – rhetorical.

When you invest in any company, you are also investing in management’s character.  If you think otherwise, I would recommend you re-examine your investment strategies, for misdeeds (in addition to mismanagement) of management have repeatedly wiped out stock holders.  Ask Enron, WorldCom, Tyco, etc., if you still believe I am grinding some agenda.  We know, from the short history of Facebook, of Zuckerberg’s other legacy – his legal troubles - over amounts as small as a few hundred dollars, and up to a few billion if one were to believe in Paul Ceglia’s claims(Paul Ceglia v. Mark Zuckerberg).  In addition, every early stage investor (read, Vulture Capitalist) wants to wring the most out their ‘patience’ and ‘foresight’.  A perfect storm was brewing in the Facebook teacup!

Informed Investors (read, Hedge Funds, preferred institutions) had to know, that Zuckerberg and his Vulture investors were NOT about to leave ANYTHING behind on the table.  Not a single dime.  Not just in pricing, but in selling as much of their holding as they could.  The result – IPO shares were inexplicably increased to 421 million, a 25% larger pool, and the target price was raised to 38!  In Zuckerberg’s mind, Facebook was likely worth over USD 100 billion and damn if he was not getting ALL his money. 

Amidst all the hoopla and media hype, no one dared to question Facebook’s maneuvers.  Investors’ own greed, for that lucrative ‘pop’ in share price, blind-sighted almost all.  Last, but by no means in the least, the NASDAQ exchange screwed up the FB opening trades.  A Technical glitch was to blame, as always.  Right! Try incompetence.

Wait.  There was this issue of FB secretly guiding CCR analysts about impending downward revisions to its own earnings estimates.  Of course, those CCR analysts relayed the news to the market as was their fiduciary duty.  Only, they allegedly relayed it to a select subset of investors!  US SEC and Feds are putting on a charade (like they actually care) and threatening “investigations”.  Numerous lawsuits are already in the dockets.  This thing is set to linger for a long time.

Last night FB shares closed at $28.19, down almost $10 from the $38 IPO price.  That is a 26% wipeout for stock holders.  And it has happened in less than 2 weeks of trading.  FB is now worth just $60 billion.

From my perch, FB is not even close to being done with the downward spiral of stock price.   Sympathies if you bought into the ‘early bird special’.  It’s not too late to get out.  As Kenny Rogers said, "you got to know when to fold them".   

Congratulations if you shorted FB.  You get it.

Yours Truly

(For interested readers, a detailed analysis of the True value of FB is coming.  Soon)