
Facebook Handled their IPO Exactly Right - nchuhoai
http://blogmaverick.com/2012/09/04/facebook-handled-their-ipo-exactly-right/?utm_source=feedburner&utm_medium=twitter&utm_campaign=Feed%3A+blogmaverick%2FtyiP+%28blog+maverick%29
======
joelrunyon
>> I bought and sold FB shares as a TRADE, not an investment. I lost money.
When the stock didn’t bounce as I thought/hoped it would, I realized I was
wrong and got out. It wasn’t the fault of the FB CFO that I lost money. It was
my fault. I know that no one sells me shares of stock because they expect the
price of the stock to go up. So someone saw me coming and they sold me the
stock. That is the way the stock market works. When you sit at the trading
terminal you look for the sucker. When you don’t see one, it’s you. In this
case it was me.

That was probably my favorite part of the article. He screwed up and took
responsibility for it! I'm not sure whether I should be impressed that he did
or surprised that that taking responsibility for your behavior is so rare when
everyone is always looking for someone to blame.

~~~
vijayr
It feels both right and wrong - say I sold a inferior product to someone at a
bloated price. As a seller, I made heavy profit and my business is a success.
But I _knowingly_ inflated the price and screwed the buyer (of course, it is
buyer's responsibility to evaluate the value of the item he/she purchases).
The second part (bloating the price) just feels wrong.

~~~
grandalf
In your world, what constitutes a fair stock trade?

~~~
prodigal_erik
Investors exchanging cash in hand for a discount on future cash flows, because
they have different time or risk preferences. If you can't ever come out ahead
without selling the asset (to a speculator who will of course have to kick it
further down the hall of mirrors), its price has exceeded its fundamental
value, which pretty much has to screw somebody over.

~~~
drusenko
Eh, the issue you're against is that a stock price incorporates people's
expectations of the future, and these expectations often turn out to be wrong.

This is where the gambling comes into play, but it's foolish to think it could
possibly work any other way. Take the following example:

Say Congress passes a law that seriously hurts FB, and it will only go into
effect in 3 months. There's a very small chance that FB will be able to
successfully lobby its case, and a large chance that the law that has passed
will go into effect.

Now, do you expect everyone to trade on FB's current "fundamental value"?
Anyone in their right mind could see the changes that are coming and will
price the stock accordingly. If they didn't, there would be huge arbitrage
opportunities for anyone that could short the stock today and buy it in 3
months.

Now imagine that the certainty is less clear. Your own discounted cash flows
model relies heavily on growth rate; a change in growth rate today
disproportionately affects future potential a few years down the road. There
are a lot of things to pay attention to but growth is probably the most
important in the DCF model.

Everyone is trying to guess where that growth rate will go, and nobody can
predict the future. Hence, a stock that can be volatile and not priced on its
"fundamental value" according to you.

If you disagree with this, I would suggest you propose something different
that would actually work.

~~~
prodigal_erik
If a baseball player is successful, the price of their trading cards goes up.
Why? There's no concrete relationship between the two; the league doesn't pay
the owner of the card per win. It just makes enthusiasts want to have the card
to show off, and attracts speculators who intuitively expect the price
increase they themselves help bring about.

In the same way, the success of facebook.com doesn't create any income for
people holding FB shares, it just makes it psychologically easier to flip
them. The price goes up for no better reason than everyone assuming it will.

The stock market has become a casino where self-perpetuating phantasms create
noise that swamps the signal. I can't blame any company that fleeces willing
speculators rather than try to sway value investors using actual yields. I'd
love to propose a fix but I don't have one.

------
tptacek
The post-IPO "pop" also benefits the giant investment banks that underwrite
IPOs; it is essentially a large transfer of wealth from the company to the
bank and the bank's best customers, indirected sufficiently so that it's hard
to spot.

Whatever you may think of Cuban's _caveat emptor_ stance regarding investor
protections, he's right about Facebook's role in the IPO. The CFO's first duty
is to the firm, and in this case it appears that Facebook made aggressive
decisions to ensure that the IPO benefited them first and foremost. Which,
ironically, serves the long-term best interests of outsiders who want a stake
in Facebook.

~~~
antr
_"The post-IPO "pop" also benefits the giant investment banks that underwrite
IPOs"_

Great oxymoron.

If an IPO "pops" post-IPO, and during a defined period of time the
underwriters essentially _underwrite_ , a.k.a. insure, the offering at the
prospectus price, the appointed underwriting banks have a capital loss in the
transaction. In dozens, if not +100 IPOs, underwriting banks have lost money.

~~~
patmcguire
A "pop" for an IPO means an increase in share price. Think pop vs. fizzle, not
pop in bubble terms. Companies generally underprice the stock going through
the underwriting banks so by the time they're sure to have a liquid market.
The banks have an asset they have to give away at a price everyone knows is
almost certainly below what it should be, so it winds up being a patronage
thing.

Not this time though. Someone who worked on the deal at JP Morgan told me one
of the big causes of the problem was that the clients in on IPOs usually ask
for ten times as much stock as they actually want under the assumption they'll
only get a small amount of what they ask for. With Facebook there was such a
huge quantity that they actually got it and freaked out. But that's one data
point from someone with a lot of incentive to self-justify.

------
nchuhoai
Mark Cuban's Response to [http://dealbook.nytimes.com/2012/09/03/david-
ebersman-the-ma...](http://dealbook.nytimes.com/2012/09/03/david-ebersman-the-
man-behind-facebook%E2%80%99s-i-p-o-debacle/)

Like always, love his rationale and thinking. I never understood people's view
that facebook needs to be obsessed with the stock price (apart from the
mentioned employee options). That might just be the naive youngen in me, but
what facebook should, and in my opinion does care bout is its product line and
users.

~~~
coliveira
You are partly right, but in Facebook's case the stock price is important for
a few reasons: (1) public perception: FB is a media/advertisement related
company, and it is not good to be viewed by the public as a sinking ship; (2)
employee retention: tech companies rely on stock grants to attract talent.
With a stock price that is getting lower by the day, there is less incentive
for employees to join the company.

~~~
atirip
(1) So your advice would be to cancel my (potential) very effective marketing
campaign in FB because it's stock is sinking? Or should I reduce my personal
activity? Or what?

~~~
jeltz
No, but people without any successful campaigns (they either never have had a
FB marketing campaign or their last one failed) will get doubts about if FB is
the right venue. I personally think stock price is a bad proxy, but many
people still look at it.

------
jusben1369
Mark's article misses one key point. If it were a win then he wouldn't need to
write a post defending it.

A poorly performing stock price matters a great deal. It matters in the
leverage you have with partners, retaining senior leadership, hiring new
employees and overall day to day morale in the office. So maximizing the short
term cash ramp has left FB significantly exposed over the next 24 months. YHOO
is a fantastic example of what happens if your company suddenly has the aura
of "loser" in the Valley. (Hopefully they'll turn that around but jury's still
out)

So rather than absolutely maximize the short term gain FB could have found a
middle ground that wouldn't make them the punching bag of the media resulting
in long term risks to employee morale and retention.

~~~
natrius
The problems with "retaining senior leadership, hiring new employees and
overall day to day morale in the office" can be fixed by repricing options,
which is cheap in respect to the profit Facebook made from their high IPO
price.

Yahoo isn't considering a loser in the valley because of their stock price.
It's because no one in the valley uses their products. That isn't true for
Facebook.

------
steve8918
Full disclosure: I currently own FB shares (at a loss), but could sell at any
time.

Cuban is right in that the Facebook IPO was great in that they sold their
shares for higher than what they were worth and maximized the benefit for FB.

But the more important fact is that investors, who are the lifeblood of this
entire market, got fleeced, and that's long-term bad.

The people that you do business with MUST have confidence that you will live
up to your end of any deal that you make with them. If you're only going to do
a single one-shot deal with someone, I suppose it's doable to screw them for
whatever they're worth. That seems to be the Wall-Street-style business model
that is popular with some people these days.

But if you intend to do business over and over again, screwing everyone you
deal with is a great way to go broke very quickly. As well, if you attain the
reputation of being someone that is bad to do business with, then you will
suffer as well.

Do you think Andrew Mason is going to get as good of a ride on the next
company once Groupon fails? How difficult will it be for Facebook to have
another secondary if it needs to raise more capital?

My guess is that any new deals underwritten by Morgan Stanley will get a
second look-over from any potential investors, given the fact that they really
sold some snake oil with FB at $100B.

~~~
joelrunyon
I'm going to be very surprised if FB is going to need to raise another 10B.

Also, it's interesting that when facebook pulled one over on the bankers,
"they got screwed", but when the bankers do it to everyone else, it's
"business as usual."

Of course Facebook isn't going to get valued as highly the next time through -
THEY KNOW THAT - and that's why they got as much out of their IPO as they
could.

~~~
steve8918
It will affect FB when they make acquisitions based on shares as well. It
might make potential acquirees more reluctant to take anything but cash, which
will be a drag on their financials.

FB didn't pull one over on the bankers. The bankers and FB sold their shares
to investors, so both parties are "guilty" to some extent. Investors are
guilty for believing the hype as well, but in any deal, the buyers have a lot
more power than the sellers, so keeping the investors happy is important for a
healthy market.

------
cletus
Mark presents some good points here. I like how he takes responsibility for
his own trading losses and does the correct thing: he gets out when it doesn't
do what he expects.

He's also correct that a company can reprice their options.

But all of that misses the point.

Later employees can have repriced options so they're no longer underwater but
you have to remember that a lot of people went to Facebook in the latter days
for a pre-IPO payoff that didn't eventuate. If their vesting options look
little different to an RSU package they'd get from Google, there is no "golden
handcuffs", which is what you really want for talent. If Facebook has to
reprice their options to recreate that situation they may end up spending a
lot of the cash they gained for the high IPO price.

Second, every company, every lawsuit, every _war_ has a _narrative_. That
narrative is important. If you're trying to get people on your side, the facts
typically don't matter, the narrative does. Pre-IPO, Facebook's narrative was
of going from strength to strength to the point where it had competitors
scared that Facebook would be _the_ Internet.

That is no longer the case. The spell is broken. Investors have realized this.
No longer is Facebook the company with blue sky potential. It's (now) a
company with a really high P/E ratio. Google, for example, peaked in 2007.
Part of this was the highs of the market but part of it is also this shift
from blue sky potential to viewing the company as a source of income. All this
even though Google is making _way_ more money than in 2007.

So Facebook may take _years_ to regain the IPO price. Watch out for the
pundits who see the $38 IPO price and consider $18 cheap. The first price we
see for something tends to imprint strongly and we view all subsequent prices
in those terms. It's a trap that could well lose a lot of people a lot of
money.

Beyond employee and investor issues there is another problem here: companies
tend to prefer to pay for acquisitions with stock rather than cash (eg
Instagram was, at the time, $700M in stock and $300M in cash IIRC). If the
narrative of your stock is one of it having consistently dropped since the
IPO, it makes it harder to pay for acquisitions with stock as investors and
founders have to price the stock based on expected losses rather than expected
gains.

The key motivations in any market are fear and greed. If the stock has a
history of going up (like Apple's in the last decade) then greed takes over
and people want to get in. In Facebook's case, fear would be a significant
factor now (given lock-ups of shares on acquisition, etc).

The problem with Facebook IMHO was that it waited too long to IPO. Of course
as a colleague of mine likes to say, "that train has sailed" [sic].

One thing I that makes me chuckle is thinking back to the prices paid on
secondary markets pre-IPO. Staunch FB defenders argued this was useful price
discovery (one function of any market). Others (including me) argued that such
markets were essentially echo chambers and the stock was too thinly traded to
give meaningful price information. That view has turned out to be correct.

The best part of this whole story is that the wider market hasn't bought into
the hype and has discounted Facebook stock accordingly. Any concern of us
being in a bubble should go out the window.

~~~
mikeryan
to your points an interesting article from business insider

 _It's Becoming Clear That No One Actually Read Facebook's IPO Prospectus Or
Mark Zuckerberg's Letter To Shareholders_

Quick hits from the article

\----------------------------

Didn't anyone even read Facebook's IPO prospectus? The answer, I can only
assume, is "no." Because if anyone had read the Facebook IPO prospectus, they
would have learned, among other things, the following:

Facebook's growth rate was decelerating rapidly.

Facebook's user-base was rapidly transitioning to mobile devices, which
produce much less revenue.

Facebook's operating profit margin was already an astounding 50%, which
suggested it had nowhere to go but down.

Facebook's CEO had a nearly unprecedented amount of control over the company.

Facebook's CEO had set up this astounding level of control intentionally. Mark
Zuckerberg knew all about how impatient public-market shareholders are. And he
set up the whole company so he would never have to pay attention to their
whining.

In the 9 months following the IPO, insiders would be free to sell more than 2
billion shares of Facebook that they had been holding for years.

Facebook was going public at an astoundingly high price for a company with
these characteristics—about 60-times the following year's projected earnings,
in a market in which other hot tech companies like Apple and Google were
trading at less than 15-times.

[http://www.businessinsider.com/facebook-stock-letter-
shareho...](http://www.businessinsider.com/facebook-stock-letter-
shareholders#ixzz25W9oFTeJ)

~~~
bad_user

         Facebook's CEO had a nearly unprecedented amount of 
         control over the company.
    

Is that a bad thing?

I was under the impression that Larry and Sergey did the same thing with
Google. As I remember they always retained more than 50% of voting rights, and
now there's a new special class of stock issued to shareholders with no voting
rights.

Thing is, shareholders can be irrational, especially with companies that are
working on the cutting edge, because shareholders are more interested in
short-term gains. E.g. Shareholders and Wall Street were thrilled when Dell
was outsourcing their core competencies to Asus, which in the end screwed them
over. Dell is now just a shadow of what it used to be, with no bright future
ahead.

Of course, if you view that as a warning sign, then simply don't buy. But
there are other factors at play here. Do you trust the company? Do you trust
the CEO? Do you understand the risks? If not, then maybe you shouldn't own
stock in the first place.

~~~
saraid216
> Is that a bad thing?

Nope. The article does explain this. None of the bullet points are meant as
criticism.

~~~
mikeryan
Exactly - From the article:

 _Again, Mark Zuckerberg set up the entire structure of the company so he
wouldn't be forced to make dumb short-term decisions by whining public-market
shareholders. And he TOLD them that he wasn't going to make those decisions.

They just didn't listen._

The article isn't an indictment of Facebook, its an indictment of investors
who ignored the warning signs that this wasn't a stock designed for a short
term position and are now complaining about it.

------
IanDrake
"If the CFO of Facebook came on SharkTank..."

This statement should end with "I'd offer him $100K for 50% of his company".

I really like Mark Cuban, but I feel like that show is beneath him. I've seen
it a few times and haven't found any teachable moments. His blog, however, is
great.

------
bluetidepro
He makes some great points, here. I like his quote, "When you sit at the
trading terminal you look for the sucker. When you don’t see one, it’s you. In
this case it was me." Interesting how he puts more blame on the buyer.

Also, sort of off topic (more related to just Mark Cuban), but I'm surprised
he made that "SharkTank" reference. I've always wondered how he viewed his
presence on that show. I figured he saw it more of a "charity case" because of
his fame. I never realized he actually referenced it and promoted it.

~~~
nchuhoai
I just think he really likes the show and really think he can help
entrepreneurs (I happen to agree with both). SharkTank sure is sometimes a
media play, and its sometimes less about the entrepreneur than the story, but
you gotta admit that he is helping some really good people.

~~~
uptown
I've always wondered about the equity deals that get struck on SharkTank.
Sometimes you see them make deals where the founder retains 51% of the
company, but if you dig into the paperwork from ABC you see "ABC takes 5%
equity or 2% royalty from all companies that appear on Shark Tank" (previous
discussion: <http://news.ycombinator.com/item?id=3946008> ). Whose share does
that come out of, and where does that leave the founder? If it comes out of
their share, they'd be left in a minority position if they now hold 46%, the
"shark" hold 49% and ABC holds 5%.

------
shyn3
They have a stock pile of money they wouldn't have had to play with for the
next 2-3 years while they slowly grow their earnings. If they priced it at
half they would have had half the money. Now they can sit back and relax. If
you read the documents they clearly stated that they do not intend to be in it
for the short-term and investors looking to buy shares should be thinking
long-term. Zuckerberg seems to be a conservative dude who doesn't spend
lavishly so he probably has a goal to make money and stock-pile it.

The only reason FB stock offering looks bad is because the market crashed for
a moment halting the pop. If the market popped people would have nothing to
say.

Cuban is spot-on.

------
opinali
The parallel to Google is deceiving; as phrased by Mark, some reader may think
that Google had a similar IPO crash. Not true. The referenced article and
Google's repricing is from Feb 2009, when GOOG (then already a mature stock)
had lost lots of value due to the global market crash a few months before.
Completely unrelated cases.

------
jmount
Other than AMT tax no Facebook employee can see the difference between the
stock IPOing at $38 then falling to $18 and the stock IPOing and $18. Sure the
is a lot more sturm und drang in one of the scenarios but at some point the
price starts representing the market's view (right or wrong of the future).
This is predicated on my assumption that Facebook's true value is closer to $4
(adjusting down to a P/E of around 20- I don't see a lot of growth potential
despite claims like: [http://techcrunch.com/2012/08/30/party-like-
its-1990-some-ct...](http://techcrunch.com/2012/08/30/party-like-
its-1990-some-ctrs-on-facebook-sponsored-results-ads-exceeding-3/) ). I don't
short because for that to be profitable you need to be 1) more informed and
more certain, 2) have some idea of the timing of the market coming around to
your point of view.

------
phomer
Personally I think it is sad. FB tricks people into paying too much, and then
some wealthy guy who should have been able to evaluate the offer properly gets
fooled, but because he can afford the loss he tries to justify the whole
thing, so that perhaps he can pull the same nasty stunt like that sometime in
the future.

Using Cuban's own auction analogy, he was basically defrauded by buying a
'fake' collectors item, and thinks the fault lies with the purchasers (for not
recognizing a fake when they see it) not the sellers or the auction house for
perpetrating this ruse.

Paul.

~~~
dedward
How did they trick people? Genuinely curious...

------
encoderer
I agree with his larger points, but i think it's only fair to point out the
date on that article about Google options.

That was the very bottom of the market. Googles issues were macro. And the
high-water mark in GOOG before that event was set by investors, not
underwriters.

But fundamentally I don't think FB did anything wrong. As an armchair
economist it looks to me like Facebook had enough strength in their order book
to justify their $38 IPO price. You can't blame them for trying to maximize
their one-time-only uber-billion-dollar liquidity event.

------
spinchange
What about the damn underwriters of this thing? Given the volumes offered, it
was priced to go one way: down. So they maximized the offering but now the
whole enterprise is worth half. Is the cash in the bank and the founder's
coffers worth it? I have no idea, but I would think for employee compensation
and morale purposes, it probably would've been better to leave a little on the
table. Hell, their prospects looked like they were declining right on the eve
of the IPO. What did everyone think would happen?

------
gamble
Articles like the Sorkin piece have been appearing since the IPO because
public shaming is the only tool disgruntled investors have to influence the
company while Zuckerberg retains voting control. The market is looking for a
dramatic (if temporary) gesture that will fluff the stock long enough for the
muppets who got stuck holding the bag to dump their stock on some greater
fools.

------
AngrySkillzz
I've been saying this for a while. Facebook and Zuck made out great on the
IPO. They got everything they wanted out of it. The people who lost were the
speculative buyers who thought the stock was actually worth that much and the
underwriters who lost money propping up the stock price on the IPO day sell-
off.

------
fredBuddemeyer
naturally cuban thinks baiting suckers is a winning tactic, it describes his
own success at taking yahoo's billion dollars for a company that didn't really
exist. but note it also describes his string of tech failures ever since.

------
grandalf
Cuban is right, however I think there might have been some fraudulent (but
possibly not illegal) activity of the underwriting bank to prop up the price
on IPO day and in the days after...

------
drumdance
I largely agree with Cuban. But there is risk associated with going out too
high. You can reprice options, but that introduces new complexities and risks.

------
at-fates-hands
I love Mark Cuban, but he's totally wrong here. He said the role of the CFO is
to manage the company not the stock. Well, once you open the doors to
investors and banks, they become your lifeblood. When you go public, guess
what? Your goal is to make the people and banks investing in your company
money. Otherwise guess what happens? Exactly what's happening now. The stock
takes a huge dive and your company loses a ton of its value.

FB may have put $10 billion in the bank, but the market took $50 billion out
of its value. Not exactly a win is it?

~~~
jpdoctor
> Well, once you open the doors to investors and banks, they become your
> lifeblood.

Not if your CEO has the controlling interest.

In theory, Zuck can let the stock drop to near zero, and then take the company
private by buying outstanding shares for pennies per share.

And there's nothing the bozos with common stock can do about it.

> Not exactly a win is it?

It's a huge win, because that $50B has nothing to do with the company coffers,
and has everything to do with the suckers who bought the common without
serious voting rights.

------
dustingetz
due to the massive information asymmetry, didn't FB have a legal and moral
obligation to provide an accurate valuation? this was my understanding from
reading all the post-IPO anti-facebook fallout articles.

~~~
jusben1369
That's what the S1/prospectus was for. They're not being sued because there's
nothing coming to light that they didn't cover. It's just the exuberance is
fading as reality is setting in.

------
001sky
The valuation of the FB IPO was _floored_ by the private market trades in
2010-2011.

------
Evbn
Ironic historical quote from the 2009 article:

'Google gives away free lunches to employees, but that didn’t compel everyone
else to do it,” he said.'

