Facebook last week announced its Initial Public Offering — exactly the event I said wouldn’t happen in one of my controversial predictions for 2012. But I’m sticking with my call on this one since we’re 2-3 months from the actual event and a lot can happen to screw things up between now and then. I’m pretty sure Facebook shares will be trading sometime this year, I just don’t think the company will have a traditional IPO.
Companies go public for three reasons: 1) to raise capital for various corporate purposes like acquisitions and paying down debt; 2) to secure the wealth of founders, giving their kids something to fight over, and; 3) because they have over 500 investors, secondary trading of shares is picking up and if they don’t go public under a process they control the SEC will force them to go public in a less-profitable event. Facebook in its prospectus says reason one — the most cited reason by far for companies going public — does not apply to them. They don’t really need the money and plan to park it in T-bills, which if you think about it can only drag Facebook earnings down given current low interest rates.
Give us your money and we’ll do nothing with it. Not only that, we’ll also use your money to hurt the value of your shares.
To be fair, sometimes companies go public just because they can. Remember the dot-com bubble? In that period of irrational exuberance companies went public and their shares soared for awhile without regard to profitability or even having a real business model. So sometimes you take the money because it is obviously stupid money and if you don’t take it now you may never get another chance (yes, I’m talking about you, Webvan).
But that’s certainly not the case with Facebook, which is profitable and growing, has no debt, and has $3.5 billion already earning next to nothing in the bank.
Reason two for having an IPO — to secure the wealth of founders and early investors — is the reason Facebook gave for going public and that makes sense. After eight years of hard work everyone involved would like a liquidity event so they can buy a new house and car. There’s nothing wrong with this motivation except, given the lack of actual need for capital, it shows a misalignment of interests between Facebook management and new Facebook investors. We are actually investing in their Ferraris.
Now maybe Facebook is the IPO of the century and none of this matters, but as a narrative for big institutional investors it’s a little shaky, especially when you see that after the IPO Facebook CEO Mark Zuckerberg, who is younger than the IBM PC, will still control 57 percent of Facebook’s voting shares, in effect placing total voting and managerial control of a major public company in a single executive. This is unprecedented for a company at this scale; even Bill Gates only owns 20-odd percent of Microsoft and had to answer to investors when he was CEO.
So this isn’t just the Facebook IPO, it is the Zuckerberg IPO.
Something similar to this happened back in 1988 when Dell Computer went public. Michael Dell was the Mark Zuckerberg of his era. At 24, Dell was even younger than Zuckerberg is today. Dell was smart and he was full of himself — but not so full that he thought he could carry the company offering on his shoulders alone. With the encouragement of his investors and board, Dell hired some seasoned managers to help him take the company public, then later fired them all and went back to running the company as he saw fit.
Mark Zuckerberg wants to do the same thing that Michael Dell did, just minus the pro forma hiring and firing of suits.
It’s going to be a slog for Zuckerberg. For the next 2-3 months he’ll have to be everywhere, kissing ass while not appearing to be kissing ass, answering tons of boneheaded questions from people he doesn’t respect — people who will be primarily questioning his vision and fitness to lead.
Zuckerberg is going to hate this process and might explode as a result. He’s going to be under a journalistic microscope, too, and some bad information about him may come forth (I don’t have any, by the way, but powerful people often have powerful enemies). Throw in some bad business news for Facebook or some good news for Google and a $100 billion IPO starts to look pretty iffy. There are lots of ways this process could fall apart.
What’s a geek to do?
Well just as there are three reasons for companies to go public there are also three ways to do it. The normal way is to follow the traditional path Facebook and Zuckerberg have embarked on now — hire investment bankers, do a road show, pay $500 million in fees, go public. That’s how Dell did it in 1988, though that company raised only $30 million, not $5 billion, so the fees were significantly lower.
The second way to go public is to do nothing at all yet have more than 500 investors and a brisk secondary trading market in private company shares. In that case the SEC will do the IPO for you for free (well, they’ll fine you too, but not much) which sounds good in a way but must be bad because nobody ever does it. Name a company that went public in this manner? I can’t.
The third way to go public is by buying or merging with a company that is already public. This is viewed on Wall Street as the chickenshit method because it generates nowhere near as much in fees to investment bankers who, after all, are the cowboys driving this herd. To be fair, most of the time when companies back into going public it is because of weakness. Certainly the public company they are buying is weak, often valueless. The decision to use this method is often based on being unable to find an underwriter to go public by the usual route and not having the capital to wait for better times. Again, it’s hard to find a really big company that has done it this way, though little companies do this all the time.
But that’s exactly why I feel Facebook will abandon its present IPO course and instead buy a public company.
No road show for one thing. Zuckerberg’s agony ends. The idea that acquiring a weak public company would drag down Facebook shares is ridiculous because Facebook is so big and available public shells are so small that the dilution effect would be vastly less than that $500 million in banker fees.
Here’s an idea: Facebook might actually find a public company it wants to buy. Yeah, that’s the ticket.
And while buying a public company would limit the amount of money Facebook would be able to raise initially, the point isn’t to even raise money, remember? The negative effect of all those T-bills would be avoided.
That’s why I think Facebook will change course and back into being a public company. It’s cheaper, easier, and accomplishes the same result. Five years from now nobody will even remember how they did it any more than they can explain Google’s Dutch Auction IPO in 2004.
Sounds more like trying to justify 2012 prediction #5 than reality.
Maybe Zuckerberg would just like to be a billionaire? Why not strike while Facebook is hot? Things do cool off in tech-land and what’s hot today is not tomorrow.
Cashing in while you can is not to be underestimated. What would your tolerance be for inane questions if you knew there were several billion dollars for you after answering them.
The Facebook IPO is coming and it is coming in 2012. You could argue this is the peak of social media mania and as we live more alone in society, we’re going to live more alone on-line too.
John R.
Like everything I write here it is an expression of opinion with a big dose of explanation thrown in. I think context is important for big events. In the case of technology IPOs, how is Facebook similar to or different from Microsoft, Dell, and Google? That’s what this is about. Those companies followed courses that made sense to their leaders at that time, but none of them, were as bold as Zuckerberg and Facebook and none of them face his particular circumstances. The closest to Zuckerberg was probably Dell because he, too, was very young, and because he quickly regained command. But Zuck doesn’t want to bother, and where Dell raised $30 million Facebook wants to raise $5 billion, which is in an entirely different galaxy. Remember Dell was worth $20 billion four years after his IPO. It’s not like you have to make every penny on the first day. And trying to do so makes it that much riskier. THAT’s what I was trying to say, and did.
I like the acquisition public offering (APO) idea. In fact, the way to go would be to find a public shell with a huge amount of NOL on the balance sheet. Though that would likely only represent a rounding error for Facebook’s earnings. Regardless, this is a bold move that will put a shot across wall street’s bow. Remember, Steve Jobs spent some time mentoring Mark. I would be disappointed if there wasn’t a bold move from Mark.
You forgot to tell us which company they are going to buy!
Netflix would be a good candidate. It’s a great company from the consumer end but Reed Hastings is just batshit insane and has no idea of the true value of what he has in his hands. It’s also trading far lower than the go-go days of last year and would be relatively cheap. Netflix isn’t making money right now while the content providers are trying to squeeze them hard after they developed this market far better than any competitor has or could do save for Red Box. A little Facebook glamor would easily rub off on them and eclipse anyone who hopes to compete with them (I’m looking at you, Red Box!).
Zuckerberg has the balls and clout to negotiate with Netflix current and potential content providers. He’d be able to use the Facebook brand recognition to paint a picture of far higher volumes of streaming media *if* the price was right. This is very similar to the Steve Jobs staredown contest with ITMS providers.
This would be a win/win for both companies and unlike just funding Ferraris this could actually be a decent business move for investors as well.
4th!! 3rd not including bobby!
Not that your idea doesn’t have merit, but as you say it’s hard to think of a really big company that has ever done it and I doubt Facebook is going to be the first.
Also, purportedly Facebook is driving a hard bargain with the Wall Street firms and will be paying very nominal fees– assuming that’s true then they don’t have any reason not to take advantage of the Wall Street firms muscle and raise top dollar for their shares.
Cringe, I’m actually in an annual financial picking contest and Facebook going public was one of the questions. I ran with your prediction, now I’m not feeling so good.
I actually now believe Zuckerberg will follow through on the IPO and will develop a personal exit strategy. Facebook can topple like Yahoo, Myspace, and the others. We never know what the next hot item is and for all I know Zuckerberg already is planning something.
So my prediction is he follows through and as Craig Ferguson would say, goes for the Big Cash Prize.
Interesting hypothesis but doesn’t it discount the perception value that is so crucial in stocks? If FB does an unorthodox IPO route that’s usually reserved for weak companies, it generates negative press and speculation. They can counter with cooler-heads analysis of the numbers you crunch above, but with slowing growth in FB memberships in key markets and uncertainty about the possibility of disruption in the social media landscape, taking a “chickenshit route” to IPO seems a risky way to save a few hundred million bucks they don’t even need — especially if they’re already bargaining massive discounts from the brokerage firms already.
As far as breaking convention, can’t Zuck just say “screw the road show” since traders are already lining up to buy shares?
If he has so much buzz and clout now, can’t he essentially invent a fourth way to IPO, the Zuck way, where he pays only 150M to desperate investment bankers who need to be in on a marquee event, replaces the road show with a series of stage manages Facebook Hangouts, and buys out whatever company you’re secretly thinking of with the cash?
Picking nits: Dell fired those suits (a bunch of Tandy and IBMers) in the spring before the 1988 IPO – my dad was one of them. Not much on Google about this, but that was a LONG time ago.
Although he hired and fired the IBMers, it seems like Michael Dell learned something from them or the experience with them, as he replicated the process again by bringing Mort Topfer in from Motorola.
Mort was a big driver in the climb to the top Dell subsequently experienced, possibly because by then Dell had learned to listen.
Oh Bob you’re so wrong it’s hilarious. Facebook is going public for one reason and one reason only. The first poster said it, although not quite in the words I would choose. Facebook is going public because they’re way overvalued and Zuck knows it. He’s playing it safe. They may still end up generating lots of revenue a few years from now, but he’s going to get rich now, while it’s a sure thing. Facebook’s valuation is absurd. They generate what, four billion in revenue annually? That only justifies about a 30 to 40 billion IPO. They may never generate the revenue worth a 100 billion valuation. The strategy is to cash out before the world figures out that social will never be as profitable as they thought, not even close.
This makes sense. Striking while the iron’s hot is much more gratifying than waiting until it inevitably cools & your hammer just clanks on it.
It’s like trading your team’s Cy Young winning pitcher now, for a raft of high quality draft picks, instead of waiting until he’s sprained an ankle, been suspended for throwing a spitter, & stolen the league president’s mistress…
I’d be happy to see Facebook fall on its face.
Relatively speaking of course.. the only way is if it goes for $100B and only gets $30B.. maybe it’ll lose its mojo then too… and eventually go the way of myspace.
Ah, but what about hubris? Don’t you think it’s the ultimate ego stroke to have the biggest, grandest IPO in history?
I am not buying what the Cringely is selling here. I don’t think the fees will be that high for Facebook.
http://dealbook.nytimes.com/2012/02/01/with-facebook-morgan-stanley-wins-bragging-rights/?scp=16&sq=Facebook%20ipo&st=cse
“Such is Facebook’s prominence that banks are willing to work for a much lower fee than usual. The company is expected to pay its advisers a fee as low as 1 percent of proceeds raised, according to a person briefed on the matter. That would be far below the norm of 3 to 7 percent, though the size of Facebook’s offering guarantees a still-handsome payout.”
I don’t think Zuck will be able to back into going public. I don’t think he wants to go public. I don’t think he realized what he was getting into when he got Goldmann-Sachs as an investor. This whole IPO business is about Goldmann-Sachs doing a pump and dump. They are going to get their money and dump the stock.
After a while, we will learn that the eyeballs that are being sought after on FB are not as valuable as FB wants us to believe. They won’t be able to hide this once they are public.
FB is doing well, but it is tenuous. Some would argue that people will do to FB what FB did to MySpace, and as long as there isn’t another FB like service, FB is safe. I disagree. Nothing has to come along to replace FB. People can just decide they don’t want to do FB. Digg didn’t suffer because of a service that was like Digg but better. AOL and MSN didn’t suffer because there was a service like them but better. People just lost interest. That can very easily happen to FB. FB is like every other user content oriented enterprise. 5-10% content creators, 90-95% browsers. If that 5-10% drops to 1-2%, or the 90-95% just stop logging in, game over. And FB wouldn’t even have to do something “wrong” for that to happen.
I personally use FB a lot – i’m one of the 5-10%. But for me, it is more of a micro-blogging service than anything else. I don’t use it to wonder if a friend of mine is having a cheeseburger or to converse about last night’s episode of Family Guy. I use it because it was easier to blog there than it was to set up a blog and hope to find people to follow me. If i decide i don’t want to blog anymore, or I attract some form of following that would allow me to have my own blog that could perhaps (gasp) get ads, I’ll leave. (more likely to be the former reason than the latter). The really heavy content creators will bubble to the surface (like they did on Twitter) and then get other platforms, diminishing FB’s value.
I actually think Cringe may have a point here. Perhaps an all-stock sweetheart acquisition of Yahoo!?
Dell Computer had a market cap of about a billion dollars (maybe two) through the mid-90s. Where’s this $20 billion figure coming from?
Although I don’t agree with some times and I’m not a fan of Karl Denninger, he does have a very plausible and interesting set of arguments about why Facebook is going public and why investors should stay clear of the IPO on his blog:
http://market-ticker.org/akcs-www?post=201409
So does another financial site, Zero Hedge (via Reggie Middleton)
https://www.zerohedge.com/contributed/worlds-first-phenomenally-forensic-facebook-analysis-what-you-need-you-invest-pt-1
Looks to me that the reason for the IPO is a variant of Number 2: I want to make sure we (Zuckerberg and VC investors) get wealthy AT YOUR EXPENSE, sucker retail investor!
Is this the signal that social networks are going the way of dotcoms and tulips?
Disclosure: I hate the new “Timeline” and I find I am spending (like the above analyses state) less and less time on FB, although I never spent a lot of time on it and have only been on it since the last year.
This story has a number of unusual angles.
No doubt one of the primary reasons Facebook is/may go public is from pressure from the financial community. It is something of great value and it is hard to keep Wall Street from wanting to make money on it. All (most?) companies of Facebook’s stature are public companies. Going public puts Facebook in the same club as Apple, Google, and Microsoft.
If you’ve watched other IPO’s it is like watching a piranha attack. Big investment firms swoop in and buy quickly, then sell off their shares minutes or hours later as the slower investors get into the game. By low sell high. Price rises and falls quickly. The first in make some money, everyone else loses. I suspect the folks want individuals to own their stocks and don’t want to subject them to the IPO feeding frenzy. I would not be surprised if Facebook came up with a way for established users to reserve some stock at a fixed price. What if Facebook reserved over 1/2 of its shares for the private purchase by its users? Wouldn’t that be interesting?
Next question — what will Facebook do with all the money it will get? They may not be going public to get richer. They may already have ideas on some uses for a lot of money. What if Facebook decided to buy Yahoo?
The problem with Facebook is growth. It’s already huge! (850million users). If they go public, they will have to awnser to shareholders, who will expect a big return on their investment.
Now, don’t get me wrong in the short term their will be a LOT of money to be made, but 5-10 years down the road I can see Facebook running into problems unless they do what Google has been doing by diversifying their portfolio. But even Google is still a 1 trick pony after all these years, so even that might not be enough to save Facebook. My gut tells me some other company that doesn’t exist yet will overtake Facebook in 5-10 years.
To sum up: After the dust settles Growth+Expectations will be Facebooks downfall.
$3.5 billion in cash is nice, but not enough to do a big acquisition (or, as is lately fashionable, to gobble up patents). Doing an IPO gives Facebook the cash on hand to make a strategic acquisition, should they need to rapidly do one. Yes, they could do an all-stock acquisition, but that’s a tough sell when your stock isn’t publicly traded (no one knows the “real” price of your stock).
> They don’t really need the money and plan to park it in T-bills,
> which if you think about it can only drag Facebook earnings
> down given current low interest rates.
I don’t understand this.
If before the IPO, Facebook was earning (say) $10M a day,
and after the IPO, it continues to earn $10M a day from its
normal operations PLUS the measly $100K a day from its T-bills,
then how are the earnings lower?
I guess there is something about accounting that I’m not
understanding here.
How about it Bob (or anyone)? Can you explain how having a lot of T-bills sitting around would drag down earnings?
I can try. Perhaps he means earnings per share. People are buying Facebook instead of T-bills directly because of Facebook’s current value to its shareholders. If Facebooks earnings don’t increase as the number of shares increases, the value to each shareholder goes down.
What he means is that Facebook’s revenues are growing at a certain rate. Let’s say 20% per year, which is probably conservative, but is fine for illustration purposes.
This means they’re getting a 20% return on all monies that they plow back into the company. 5 year T-bills have a return of .82%. And 30-year T-bills are about 3.1%.
So if Facebook has $5 billion to invest, and they’ll get a 20% return if they use it to build their business, but only 3.1% if they put it in 30-year Treasuries, you can see how that would drag down the earnings.
Since they don’t NEED the money (i.e., all internal projects are fully funded) they don’t have anything to spend this new cash on, and it will just sit in low-yield instruments like T-bills or money market accounts.
The reality is that this won’t really hurt the company, because they’re making so much that it doesn’t matter. Look at Microsoft for the first dozen years after it went public, or look at Apple over the last decade. It’s a similar situation.
How about this method:
Create another company whose sole purpose to go public. Give it a dead-end product; and have the executives (or junior executives, or some friends) at FB be the executives of that company. The company is 100% worthless.
Then, just buy the, now public, company.
No need to go and find a company to buy; and you can set the price yourself.
Facebook IPO was going to draw how many comments again..?
[…] I, Cringely » Blog Archive » Zuckerberg’s Complaint – Cringely on technology – interesting take on the likelihood of the Facebook IPO […]
You’re Pure Genius! Over the Top! But the thought pattern really gets me going. Quite Entertaining 🙂 I like your third and final rendition of how you perceive Facebook will become a publicly traded company.
I believe Yahoo! will be stepping back into the game real soon as PayPal propagates publicly in brick and mortar retail locations. The possibilities are endless considering the new CEO. I guess we can safely say we now have our New Big 3 of the Digital Highways. Google, Yahoo and Facebook. What a Strategy? Of course they all shake hands. LinkedIn is also there on the back end. Wikipedia as well.
Conglomerates of sorts that seem more interested in generating Commerce and serving Communication. I really appreciate them. They generate so much information for me to read and view as a spectator of an Intellectual Creation Provider(s) Chess Match.
Love your story and how you perceive Facebook’s IPO. Cheers! and Thanks for the insight.
🙂
Zynga? Why not just by Zynga? I realize the shares have appreciated a bit in the time since their IPO but only 6 percent or so. The cost would be minimal in Facebook scale dollars. Its already public, and its closely tied to their existing business. Their own site is after all Zynga main market, and Zynga provides content with help drive page views and by extension add dollars for Facebook.
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