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Home > Blogs > Anthony Harrington > The botched Facebook IPO and the dilemma of stock options and falling prices- Part One

The botched Facebook IPO and the dilemma of stock options and falling prices- Part One

Facebook IPO and the dilemma of stock options and falling prices- Part 1 Anthony Harrington

Two heavyweight journals recently delivered a thumbs down verdict on Mark Zuckerberg’s handling of the Facebook IPO. Forbes tackled the matter head on with an article by one of the journal’s staff writers Nathan Vardi, unambiguously entitled: “The Man Responsible For Facebook's Stock Debacle Is Mark Zuckerberg”. I’ve seen snappier titles, but this one makes its point up front.

The second verdict comes from Barrons, which never liked the idea of Facebook’s IPO, regarding it as way too rich a bet on a company that still had to find a coherent way of monetizing its huge but fickle user base.  With Facebook’s price down somewhere between $17 dollars and $23 dollars at the time of writing (September 23), a long way off its IPO high of $38, Barrons still regards the stock as hugely over-priced. This has to be extremely bad news for Facebook staff, who have been the recipients of large chunks of Facebook stock options, unless the current nosedive turns out to be simply teething problems and the stock learns how to fly.

Which brings one to the question, how does a stock like Facebook regain momentum after a duff IPO? also floundered for a short while after its IPO, but Amazon had a great business model and a sure fire way of monetizing its idea. It was selling books. What exactly is Facebook selling? Connectivity? Hmmm. How do you monetize connectivity again? You don’t know? Me neither. Even telecommunications are struggling to make a profit out of being the link between this and that. However, the problem for investors is that connectivity is what Mark Zuckerberg is passionate about. He wants Facebook to be the way the world talks to itself.

He spelt out his beliefs very clearly in the Facebook prospectus for those who had eyes to see and ears to hear. Back in May, Business Insider pulled the relevant quotes out and highlighted them for all to ponder.

Specifically, he said:

  • "Facebook was not originally created to be a company. It was built to accomplish a social mission."
  • "We think it’s important that everyone who invests in Facebook understands what this mission means to us, how we make decisions and why we do the things we do."
  • "We don’t build services to make money; we make money to build better services."
  • "We don’t wake up in the morning with the primary goal of making money"
  • "We’re going public for our employees and our investors."

Clear enough?

In a sane world this should have caused the IPO to debut at vastly less than $38. Zuckerberg was deliberately retaining 57% of the voting stock for himself, giving him a controlling share forever, while telling new investors that they were, as Business Insider put it, “simply a source of liquidity for Facebook’s employees and existing investors”. Sweet. Why wouldn’t you be a new investor on that basis? Particularly when Zuckerberg is at pains to stress that for him, money is just a way of feeding his technology machine, while for investors, returns are everything (why invest otherwise?).

Moreover, new investors knew, or should have known, from the outset that no matter how low Zuckerberg’s disregard for profit happens to drive the share price, no amount of investor bleating or outrage is going to get him fired or get a new, and more profit orientated CEO hired, unless Zuckerberg himself tires of the game or thinks of something else he’d rather do. Does this create pain for new investors? No stock can lose $50 billion in market value in 90 days without causing investors a certain amount of angst and heartburn.

In effect an investment in Facebook turns out to be a bet on the future value to be attached to Zuckerberg’s passion to make Facebook the way in which present and hopefully, future generations, connect with each other.

Personally I have always struggled to see how this could be so. Facebook looks like a nifty play on teenage egotism, which fortuitously translates quite nicely into a play on corporate egotism, since corporate marketing is even more egotistic than your average teenager. Beyond that, what? Dreaming up reasons for advertisers to want to be plugged in to all that egotistic babble was always going to be tough. When people are talking about themselves, they tend not to want to be interrupted, and especially not by irrelevant ads. So any interruption has to be hugely relevant, right up there with a message like: “Hey! Your pants are on fire.” “Eat at Luigi’s” just won’t cut it.

Which brings us in a roundabout way to stock options. Like most Silicon Valley companies, Facebook is passionate about stock as a way of rewarding employees. I pick this up in Part 2.

Further reading on IPOs

Tags: Apple , Facebook , Facebook IPO , IPOs , market , option , price , stock market , stocks and shares
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