Friday, 3 February 2012

Face the music

A terrible decision for the company and its founder. A great decision for everybody else. Welcome to the crazy world of private equity.

Facebook needs an IPO like a hole in the head. It doesn't need the money. The only possible use it has for it is to pay off some tax liabilities being triggered by doing an IPO. Most of the money is going to be invested in US government bonds - impeccable logic of raising expensive equity and investing in bonds that yield nothing. The business itself is a cash spewing machine - it doesn't need more cash. On the contrary it doesn't know what to do with th cash already being generated. Actually the risk when too much cash is sloshing around is that the Board will go and make a stupid headline grabbing acquisition.

Mark Zuckerberg doesn't want to do an IPO either. He doesn't need the "valuation" to prove to everybody that he is rich. He's going to lose every autonomy he had in running the business - now he has to pander to the quarterly whims of so called experts called analysts. Being listed is like a curse - the number of regulatory and legal constraints the company will have is enough to make you lose your senses. An independent Board of eminent personalities will sit in judgement over everything Zuckerberg wants to do. Two quarters of missing forecasts and they will have to sack him. Companies that need capital have no other option but to eventually list. The slight problem is that Facebook does not need any more capital.

Its the current shareholders, minus Zuckerberg, who want an IPO badly. They want to encash the fortune they are sitting on. The likes of Aegis Capital, Goldman Sachs, etc. The employees with stock options want to become millionaires. They love the IPO too. The investment bankers who are handling the IPO are beside themselves with excitement - the prospect of fat fees of unimaginable proportions makes you drool doesn't it. Especially when they need to do no work ; after all the shares are going to be bought up even if a donkey handled the issue. The "market" loves it - it will provide employment to a clutch of useless analysts who will write learned treatises on the company without having a clue about it. Day traders will buy and sell everyday, speculating and punting like crazy. We, the wonderful public, can now learn all about its innards and criticise its decisions.

Mark Zuckerberg knows all this. But he probably had no choice - his shareholders must have pushed him and after holding off for so long, had to eventually give in. Facebook can go only one way now - down. What a waste.

PS : Full disclosure - This blogger does not like Facebook. He does not go there.


Shachi said...

Totally agree. Lame move.

gils said...

From Zuckerberg to suckerberg kaasay thaan kadavulada :)

Appu said...

Total agreement :)
Coming to Investment bankers, read somewhere they were ready to lower their fees, since even the low percentage will be a big fees considering the size of the deal.

I like as well as dont like FB.
I dont like cause it wastes much of my time. It definitely has a sticky factor to it. I like it cause of birthday reminders and networking!

There is something not so right about it. I am also of the opinion, even with out IPO they would have gone down. At least now some one will make money. If you ask me why it will go down, it is just the way it is! shorter lifetime.

Asha said...

Perhaps Zuckerberg's commitment to his employees like when NRN's co went public many of their employees were benefitted.

FB is like a whirlpool it sucks you in, but a good medium to exchange news.

Prats said...

I so agree with you, and it would be so terribly painful for Zuckerburg to go through this.

I have always felt the Investment Banking industry is parsitic in nature and I think the fate sealed when they got associated with facebook in the first place.

TMM said...

Well, what's wrong with creating millionaires out of employees? It's probably Mark's way of rewarding his employees. Corporate life as an exec might give you the lifestyle (jet setting, 5 star hotels, power lunches, Dom Perignon and Cohibas etc and all other stuff which is essentially borrowed glory) but does not give you wealth. Wealth is created when you have that streak of enterpreunership or can work for a small start up company with like minded enterpreuners. Whether Mark's company needs this cash or not, at least he is creating wealth for his employees. Mark, Good on you mate! (from an unabashed lover of capitalism and wealth creation and one who thinks Investment Bankers and Hedge Fund Managers are not necessarily satan incarnates)

Ramesh said...

@Shachi - Mmmmm

@Gilsu - Was there any doubt about it ??

@Zeno - Surely there are better ways of remembering birthdays than Facebook !!

@Asha - Yes indeed. That was one motivator as TMM also points out

@Prats - See also opposite viewpoint from TMM

@Kiwi - Understand and appreciate your viewpoint. I don't also subscribe to the investment banker as Satan theory. I have no quarrels with employees becoming millionaires (especially the painter who took FB stock instead of cash), but what troubles me is that the move is not good for the company.

Sandhya Sriram said...

I once heard a speech of KV Ramani in a Nasscom summit. of course subject to disclaimer that i may have understood what he said, this way, he said, when you really feel that you have come to a point that you are doing really well, have the courage to give up and exit and do something else. and somehow, it struck a chord some where. Maybe, the dominant logic of makign more money isnt it always.

Of course, Mark is not giving up or something, but maybe the move is slightly beyond making goldman sachs and employees happy.

Appu said...

Boss, Just observed that in the first year it had been 225 , then 125 then 92 . number of posts per year. hope this year 225 will be surpassed :)

Ramesh said...

@Sandhya - Ramani's point is an intriguing one - some people do indeed do it. But the Facebook case is simply one of investor pressure for an exit , I think.

@Zeno - Flattered that you bothered to even look at those stats. Hope to write regularly , but 225 was a bit too much !

J said...

I still dont fully get this IPO. The employees of FB were apparently already selling their shares in a secondary market - SecondMarket. So clearly they were not suffering. As for Zuckerberg, he still gets to totally control the company with his class B shares which will all be fine till his first misstep by which time it will be too late to start thinking of corporate governance. So I feel sorry for the eager investors who want a piece of FB IPO. There are those types, are there?

Hema said...

Oh yeah...must be so stressful and tough for Mark to do this.
Too bad Fb has to go so soon.
Would have to say a a lot of farewells to all those friends who were re-discovered thru Fb.
You will not agree, but it has certainly been a great source of virtual socialising and bringing in some connectivity.
A lot of my family is on it and we exchange news in a jiffy thru fb and feel connected all the time.

Ramesh said...

@J - Yes, there are enough suckers to simply buy anything that is famouys. I think this IPO has been simply pushed by the funds which invested in FB and want to exit.

@Hema - Oh its far too early to write Facebook's obituary. The site and the users will thrive and we can still have wonderful messages such as "I woke up in the morning" :) Its the business itself which I think will be adversely affected.

Vishal said...

The facebook is already on the downhill. I do find that activities have gone down substantially in FB and people who used to paste each frame of their life are also included in that list. So, probably cashing in on IPO of facebook may not be a good idea. I hope that Mark plans his moves very well going ahead!

P.S. - there are more wonderful messages like 'I woke up in the morning' - eeks! :)

Ramesh said...

@Vishal - Plizz to share more wonderful messages than "I woke up in the morning" :)

Santhosh said...

If FB is going to choose IPO, they need to mention in the prospectus about the usage of IPO proceeds which is being collected from public. So, investors can look out for details in that column and then invest if they really want too.

Vishal said...

Oh, there are too many like "I am in grocery mode", "waiting", "walking", "had free lunch" and God know what not. FB has incredibly captured all the events of one's day to day life. :)

Deepa said...

Trust you to come up with the other side of the story. The whole media world is singing about the glories of the FB IPO. And it definitely is going to make a lot of people rich. But no one talks about the repercussions on the business. It fortified my view about taking the news with dollops of salt and to get the story from more than 3 sources before you drew a conclusion on something.

Ramesh said...

@Deepa - Alas; me the spoilsport !!

Ramesh said...

@Santosh - Welcome to this space. Thanks for your comment. Yes, they have to mention what they will do with the money in the prospectus and they have indeed mentioned that they will invest in government bonds !! But who cares about the fine print. The stampede is truly on.

@Vishal - :):)

Hema said...

oh!...I was referring to a news item I read where Mark has mentioned that maintaining FB is becoming too stressful and so he is intending to shut it down in March!

RamMmm said...

:-D How else (and when) would the investors/employees make their money? (The market is as fickle as it can be. Look at Groupon!) Let Z worry about how to run his company, manage his cash pile and tackle the fickle analysts. Others count their cash.

Ramesh said...

@Hema - Ha Ha. Since the site also carries the news that an alien spaceship has been found under the Baltic Sea (they have even identified it as from Planet "Gootan"), we can totally rely on it.

@RamMmm - As Gilsu says, kaasethan kadavulada.

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