
Facebook fought SEC to keep Mobile risks hidden before IPO - ahsanhilal
http://www.bloomberg.com/news/2012-10-10/facebook-fought-sec-to-keep-mobile-risks-hidden-before-ipo-crash.html
======
aaronbrethorst

        Ryan Cefalu, a 34-year-old data-systems manager and
        father of two in Baton Rouge, Louisiana, said he
        bought about $4,000, or about a month’s salary,
        in Facebook stock and has lost about $2,050 on paper.
    
        “The IPO went terribly,” he said. “I expected it to go
        up for a couple days at least before it went it down.
        That never happened. It never had a chance to.”
    

I have zero sympathy for him. His investment strategy appears to have been
"find a bigger sucker" and, unfortunately for him, he turned out to be the
bigger sucker.

I'm a shareholder in FB, and have lost about 18% of the money I've put in, but
I always expected it to go down for a while[1]. I actually never intended to
invest until the first lockup period expired, but I got edgy when they finally
started revealing their Adsense-esque ad strategy. As it works out, I'm
actually at breakeven on the money invested after the first lockup expired. I
figure that, within a couple years, my wild and crazy 'buy and hold' strategy
is going to look pretty smart.

Then again, I could always turn out to be the bigger sucker ;-)

[1] Of course, my first tranche is down 40%, but I'm actually making it up on
volume :P

~~~
dspillett
_> I have zero sympathy for him. His investment strategy appears to have been
"find a bigger sucker" and, unfortunately for him, he turned out to be the
bigger sucker._

While I have no sympathy for him specifically, if a significant risk was
deliberately kept from potential investors then I'd support investors more
generally (I'm sure there were many who had less silly investment plans, who
were genuinely investing in a company to see it and their investment grow long
term) if they demanded an investigation into why this did end up staying
hidden until after the IPO.

If fb _fought_ to keep the information hidden, the situation can't as easily
be filed under "it is the investor's problem that they didn't ask/research" as
many stock market moans can be.

~~~
drusenko
The SEC's role is to play devil's advocate. You would think it obvious that FB
would fight against that.

To me this article screams: "Waaah, I lost money on FB. Yes, they disclosed
all of their risks ahead of time, but I would rather they would have predicted
the future so I could go back and not invest".

If you think investing in hype is guaranteed money, you deserve what you get.

------
cletus
The "average Joe investor" stories seem weirdly out of place, particularly for
a Bloomberg piece. I guess it's a shallow attempt to engender sympathy, which
is odd because I have precisely zero sympathy for either of them.

Lots of people (myself included) had been saying that Facebook was overvalued
pre-IPO. I don't say this as any testament to any investment acumen I purport
to possess (on the contrary, I largely suck at particularly short term share
trading). What I do mean is that as an outsider with some cursory research and
common sense, this was entirely predictable.

The only unknown with the IPO was how irrational the market would be and I'm
glad to see it wasn't.

The people who say "look at the eyeballs they have; the sky is the limit" are
the last people you should take investment advice from. Facebook had (and has)
two primary sources of revenue: advertising and virtual goods. Valued against
similar companies it was overvalued. And still is (IMHO).

I think this piece overstates that Facebook was attempting to hide things
here. It's natural that any IPO will try to disclose as little as possible and
try to be as positive as possible while stil being truthful and accurate.

Personally I may think of buying in if its gets down to $10-12.

Even so, Facebook is an extremely risky investment. Instagram is a cautionary
tale here: from nothing to existential threat that you need to buy-to-shelve
for $1 billion in two years... well, I guess it doesn't take much to threaten
Facebook.

~~~
aleemb
> Lots of people (myself included) had been saying that Facebook was
> overvalued pre-IPO.

You could have shorted the stock or traded options.

There was a fair bit of uncertainty because the average Joe, his family and
friends all used FB. Many investors feared that the stock would be driven by
sentiment rather than rationality. If the stock went to 50, it would not have
surprised me.

Like you I didn't support the high IPO valuations either but I still would
love to own the stock with minimal downside risk. As would a lot of other
people out there. FB has a lot of appeal.

At $10 the company will have a market cap of about $20 billion, which is
pretty low for a company with a billion monthly active users. If you discount
that, you are probably discounting the bigger picture.

At some point Apple had tremendous unrealized potential. The idea that it
could get into phones and do really well wasn't hard to digest. On the
contrary, it seemed like an obvious move.

FB has similar unrealized revenue potential. It could start charging $X per
month to businesses with > Y fans. It could offer premium dashboards +
analytics or similar features. There is no shame in premium, I am not sure why
they only do advertising and commissions but my sense is that currently they
are focused on growth and building a moat around their business.

I don't own the stock and I don't care if it goes up or down but your post
seems be discounting the company's potential.

~~~
palebluedot
_> Lots of people (myself included) had been saying that Facebook was
overvalued pre-IPO.

You could have shorted the stock or traded options._

Before you short any stock, it is wise to keep in mind the maxim "Markets can
remain irrational a lot longer than you and I can remain solvent". This isn't
really a problem on the long side (sans margin), but is a real problem on the
short side.

~~~
anigbrowl
That's the main reason I didn't short it - so many people seemed so invested
in the IPO being a success, that I thought it would turn into a self-
fulfilling prophecy. I'm surprised it fell so far and so fast; I think the
trading glitch on NASDAQ took the bubbles out of the champagne for so many
people that fiscal reality set in a lot earlier than it would have otherwise.
Of course, going on the market at $38 didn't help, but their pricing strategy
was sort of constrained by activity on Second Market.

------
tokenadult
The IPO has done a lot to convince me that Facebook is a fundamentally slimy
company. Regular day-by-day use of Facebook convinces a lot of my friends of
the same thing. So why are we using Facebook day by day? Because we think we
can catch up with one another's news and have interesting discussions on
topics we all enjoy at the expense of Facebook's investors.

This has been done before. A lot of my friends used to hold their noses and
gripe about AOL, but use it daily. AOL was founded in the 1980s, so it has
reached the twenty-five-year age referred to in another comment in this
thread. AOL is still in business, amazingly, although it is now far from being
the dominant company in online interaction (that would be Facebook, these
days). I've said it before, and I'll say it again: "Facebook will go the way
of AOL, still being a factor in the industry years from now, but also serving
as an example of a company that could never monetize up to the level of the
hype surrounding it." I could be wrong, but that's my sense of where Facebook
is in the market.

~~~
anigbrowl
Agreed about AOL, and I'd cite Compuserve as an additional example.
Fundamentally, I feel these companies are the online equivalent of shopping
malls - consistent, curated, and safe. They even have the same sort of
controversies: controversial photos of breastfeeding Moms on Facebook don't
seem all that different from kerfuffles over breastfeeding in a mall food
court. In pg-speak, facebook would be more of a cathedral than a bazaar, but
I'm not quite ready to equate shopping with religion :-)

I don't think there's anything wrong with this; I'm not a shopping mall type
consumer, but I enjoy wandering one now and again and can see the attraction.
From an investment standpoint, it strikes me that the value of brick-and-
mortar shopping malls is very much a function of the diversity and quality of
the tenants they can attract, making Zynga the equivalent of the 1980s
amusement arcade.

------
Aloha
I found the initial valuation questionable to start out with.

But its clear to me, Zuckerberg is more interested in long term growth of his
company than he is any short term profitability goals. I think Facebook may
well be a great stock to hold over decades - but not for months or weeks, as
the current market seems to think in.

~~~
htmltablesrules
I wouldn't want to hold any Internet-based stocks for "decades". I believe the
life span of any public company to be 25 years or less, with Internet service
companies being significantly less.

~~~
Swizec
25 years? Aren't there public companies still very alive and kicking that were
founded before ww2? Whose stock is still pretty valuable?

Boeing comes to mind. BMW as well. General Electric maybe. Actually plenty of
things in the hardware space.

~~~
davidw
Certainly. There are also many that no longer exist.

From a summary I wrote of "Why Most Things Fail":

Of the 100 largest industrial companies in 1912, by 1995, 29 had gone
bankrupt, 48 disappeared (mergers, acquisitions and so on), and 52 survived,
but only 19 remained in the top 100. Once you discount the large number of
small companies that fail in their first few years, the average lifespan for
small companies is similar to that of large firms - and most of them
eventually fail.

<http://www.amazon.com/dp/B000XUBDQM/?tag=dedasys-20> \- although I don't know
if I'd recommend buying it. It's good, but never seemed to gel 100% for me.

~~~
Swizec
Okay, that makes sense then. I can see how 25 years can be the expected
lifespan of a public company.

However, of those 48 companies that disappeared. Aren't those essentially
liquidity events resulting in a lot of money for the shareholders?

~~~
davidw
> However, of those 48 companies that disappeared. Aren't those essentially
> liquidity events resulting in a lot of money for the shareholders?

Some were probably good, others bad for the shareholders.

------
squid_ca
I am not an investor, financier, etc, so this will be a horribly naive
question. Please bear with me.

From the comments regarding FB's IPO on HN in general, I am under the
impression that the point of an IPO is to gain the company as much money as
possible, and that in this regard, Facebook's IPO was a resounding success.

From the point of view of an investor, though, the IPO was a huge failure.
Knowing, then, that any company approaching an IPO is trying to get as much
money as possible from its initial investors, why would anyone want to be one?
Is it solely because they are hoping that the company will be wrong about its
own potential measure of success? Or was the Facebook IPO somehow different
than an "average" one?

~~~
runako
>> Facebook's IPO was a resounding success.

That's correct. The CFO who led this should get a huge bonus. As Mark Cuban
said: if the CFO said he was able to raise $10B in an IPO and then decided not
to in order to protect investors, he should be fired. (That's a rough
paraphrase.)

>> why would anyone want to be one?

Because if you can get in pre-IPO you usually do quite well selling to the
suckers at the open. But the suckers don't realize that the key point is
"pre-". A few might remember the glorious IPOs of the 90s that seemed to
rocket up every day, and hope this will happen to every Internet IPO.

------
Cbasedlifeform
_What investors didn’t see until a month after the IPO were the letters that
pushed Facebook to disclose in detail such key financial challenges as
decelerating revenue growth, user count and its dependence on gaming company
Zynga Inc. (ZNGA) -- all issues that arose in prominence after it became a
public company.

Publishing the SEC letters beforehand would be “a better way to get the
information to the market than an amended filing,” said Peter Henning, a
former SEC lawyer who teaches at Wayne State University in Detroit. “The SEC
is a better soap box than the filings.”_

Christ, that sounds like a PR disaster if not the stuff of more class action
suits.

~~~
drusenko
I guess you missed the next part:

 _Current SEC policy is to release correspondence no earlier than 20 business
days after the IPO. The SEC doesn’t post correspondence “real time,” said John
Nester, a spokesman, because “people could misinterpret our questions to
companies about their disclosure before companies have had opportunities to
provide a complete picture.” By law, “a company is responsible for its own
disclosures,” he said._

The rules are the same for everyone... But only scrutinized when a company
does poorly.

------
pnathan
P/E of 100, stock dived. This should not surprise anyone.

Oracle has 15 P/E, so does Apple. Exxon has around 9 P/E.

For perspective; Amazon has 300 P/E, LinkedIn has 900ish.

With a bit of looking at investing information, you can get a rough sense of
what's crazy to invest in for a individual investor looking at a < 1 year
horizon. FB sure qualified IMO.

------
asadotzler
Why they chose to quote two random individual investors, I cannot say. What
did they add to the story?

~~~
andrewljohnson
Man on the street quotes give readers a personal connection to the story.

It's similar to the fact that if you tell someone a hundred people were killed
in a bomb blast, they will brush it off. But if you describe the tragedy of a
single victim, they will be crushed with feeling.

