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Facebook Handled their IPO Exactly Right

171 points by nchuhoai 14y ago

IanDrake 14y ago
"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.
shyn3 14y ago
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.
nchuhoai 14y ago
Mark Cuban's Response to http://dealbook.nytimes.com/2012/09/03/david-ebersman-the-man-behind-facebook%E2%80%99s-i-p-o-debacle/ http://dealbook.nytimes.com/2012/09/03/david-ebersman-the-ma... 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 14y ago
  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.
  - nuclear_eclipse 14y ago
    Stock grants were the last thing that attracted me to my position at Facebook. Their other benefits, and especially the workplace environment itself [1], are far more desirable to me than stock grants, especially when the salary range is already extremely competitive. 1: https://www.facebook.com/careers https://www.facebook.com/careers
  - nchuhoai 14y ago
    Agreed on (1), non-tech people continously reference the stock price totally unrelated (sigh), but for (2), they have 10 billion more to pay, right :)
  - atirip 14y ago
    (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 14y ago
      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.
  - bradleyjg 14y ago
    They raised $3 million per employee. They have plenty of ability to offer the very best kind of compensation - cold, hard cash.
    - spiffage 14y ago
      The reason tech companies rely heavily on stock-based incentives is to align the interests of the employee with the shareholder. You want the group to have a shared fate. Cold, hard cash, while attractive to people who haven't yet joined, doesn't align interests as well as stock does.
bluetidepro 14y ago
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.
- technoslut 14y ago
  Cuban always struck me as an attention whore. As always it's both. He can help a charity while putting his name out there.
- nchuhoai 14y ago
  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.
  - bluetidepro 14y ago
    Oh yeah, I definitely agree. That comment wasn't meant to be a stab at him or anything. Just how I thought he, personally, viewed the show. I actually love watching SharkTank, for it's entertainment value. There is even a local guy in our local "startup scene" that will be on the show here in the upcoming season! Pretty neat.
  - uptown 14y ago
    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 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%.
joelrunyon 14y ago
>> 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 14y ago
  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.
  - smokeyj 14y ago
    Except the person buying the inferior product is trying to re-sell it to the next sucker for a larger mark-up than you are. I have as much sympathy for speculators as I do gamblers.
  - grandalf 14y ago
    In your world, what constitutes a fair stock trade?
    - vijayr 14y ago
      Not sure. I understand how stock market works and I also understand we need stock markets for huge projects that require billions of dollars in investments. But other than that, it is just one sucker trying to find the next sucker, offload his stuff as fast as he can, for as much gain as he can. The whole thing feels a bit odd.
tptacek 14y ago
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 14y ago
  "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.
  - lmm 14y ago
    Huh? Don't they underwrite it by putting out a standing offer to buy at the prospectus price? In the case of a "pop" this costs them nothing (and indeed they make money if anyone takes them up on it, since they can turn around and sell at the market price); it's when it doesn't pop that the bank's in trouble.
  - patmcguire 14y ago
    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.
encoderer 14y ago
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.
steve8918 14y ago
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 14y ago
  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 14y ago
    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.
Evbn 14y ago
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.'
cletus 14y ago
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.
dustingetz 14y ago
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.
- jeremyjh 14y ago
  A fiduciary responsibility to their shareholders (to be)? I'm not sure. I know that selling stock is not quite the same as selling a used car.
- emmett 14y ago
  What do you mean by an "accurate valuation"? They have a responsibility to provide accurate information about their business, but the valuation is ultimately set by the market, not them.
- jusben1369 14y ago
  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.
- rayiner 14y ago
  FB had a legal and moral obligation to disclose the information they had. There is no allegation they didn't. Cuban's point that "nobody sells stock they think is going up" is a great one. Stock transactions are all about differing valuations. If you estimate the value of a stock at X+5, and I estimate it at X, I'm going to sell it to you at X+5. You're entitled to have your own estimation of the value of the stock.
drumdance 14y ago
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.
jusben1369 14y ago
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 14y ago
  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.
fredBuddemeyer 14y ago
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 14y ago
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...
at-fates-hands 14y ago
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?
- unreal37 14y ago
  No, the role of a CFO is NOT to manage the investment portfolios of stockholders. I own FB shares. I think the company will figure out a killer revenue model like Google did. But I don't blame FB for the temporary loss in stock value and it's NOT their job to make the stock price go up. Their job is to make revenue and profits, and I want them to focus on that.
- bradleyjg 14y ago
  The CFO's goal is to make the _existing_ shareholders money, not (hypothetical) future shareholders. As of the IPO it was in the interest of the existing shareholders that the company get as high a valuation as possible. If the CFO deliberately acted to benefit future shareholders at the expense of current shareholders he'd have violated his fiduciary duties.
- jpdoctor 14y ago
  > 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.
AngrySkillzz 14y ago
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.
opinali 14y ago
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.
spinchange 14y ago
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?
jmount 14y ago
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-ctrs-on-facebook-sponsored-results-ads-exceeding-3/ http://techcrunch.com/2012/08/30/party-like-its-1990-some-ct... ). 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.
001sky 14y ago
The valuation of the FB IPO was floored by the private market trades in 2010-2011.
phomer 14y ago
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 14y ago
  How did they trick people? Genuinely curious...
gamble 14y ago
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.

171 points by nchuhoai 14y ago

"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.

shyn3 14y ago

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.

nchuhoai 14y ago

Mark Cuban's Response to http://dealbook.nytimes.com/2012/09/03/david-ebersman-the-man-behind-facebook%E2%80%99s-i-p-o-debacle/ http://dealbook.nytimes.com/2012/09/03/david-ebersman-the-ma... 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 14y ago
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.
- nuclear_eclipse 14y ago
  Stock grants were the last thing that attracted me to my position at Facebook. Their other benefits, and especially the workplace environment itself [1], are far more desirable to me than stock grants, especially when the salary range is already extremely competitive. 1: https://www.facebook.com/careers https://www.facebook.com/careers
- nchuhoai 14y ago
  Agreed on (1), non-tech people continously reference the stock price totally unrelated (sigh), but for (2), they have 10 billion more to pay, right :)
- atirip 14y ago
  (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 14y ago
    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.
- bradleyjg 14y ago
  They raised $3 million per employee. They have plenty of ability to offer the very best kind of compensation - cold, hard cash.
  - spiffage 14y ago
    The reason tech companies rely heavily on stock-based incentives is to align the interests of the employee with the shareholder. You want the group to have a shared fate. Cold, hard cash, while attractive to people who haven't yet joined, doesn't align interests as well as stock does.

bluetidepro 14y ago

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.

technoslut 14y ago
Cuban always struck me as an attention whore. As always it's both. He can help a charity while putting his name out there.
nchuhoai 14y ago
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.
- bluetidepro 14y ago
  Oh yeah, I definitely agree. That comment wasn't meant to be a stab at him or anything. Just how I thought he, personally, viewed the show. I actually love watching SharkTank, for it's entertainment value. There is even a local guy in our local "startup scene" that will be on the show here in the upcoming season! Pretty neat.
- uptown 14y ago
  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 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%.

joelrunyon 14y ago

>> 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 14y ago
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.
- smokeyj 14y ago
  Except the person buying the inferior product is trying to re-sell it to the next sucker for a larger mark-up than you are. I have as much sympathy for speculators as I do gamblers.
- grandalf 14y ago
  In your world, what constitutes a fair stock trade?
  - vijayr 14y ago
    Not sure. I understand how stock market works and I also understand we need stock markets for huge projects that require billions of dollars in investments. But other than that, it is just one sucker trying to find the next sucker, offload his stuff as fast as he can, for as much gain as he can. The whole thing feels a bit odd.

tptacek 14y ago

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 14y ago
"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.
- lmm 14y ago
  Huh? Don't they underwrite it by putting out a standing offer to buy at the prospectus price? In the case of a "pop" this costs them nothing (and indeed they make money if anyone takes them up on it, since they can turn around and sell at the market price); it's when it doesn't pop that the bank's in trouble.
- patmcguire 14y ago
  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.

encoderer 14y ago

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.

steve8918 14y ago

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 14y ago
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 14y ago
  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.

Evbn 14y ago

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.'

cletus 14y ago

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.

dustingetz 14y ago

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.

jeremyjh 14y ago
A fiduciary responsibility to their shareholders (to be)? I'm not sure. I know that selling stock is not quite the same as selling a used car.
emmett 14y ago
What do you mean by an "accurate valuation"? They have a responsibility to provide accurate information about their business, but the valuation is ultimately set by the market, not them.
jusben1369 14y ago
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.
rayiner 14y ago
FB had a legal and moral obligation to disclose the information they had. There is no allegation they didn't. Cuban's point that "nobody sells stock they think is going up" is a great one. Stock transactions are all about differing valuations. If you estimate the value of a stock at X+5, and I estimate it at X, I'm going to sell it to you at X+5. You're entitled to have your own estimation of the value of the stock.

drumdance 14y ago

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.

jusben1369 14y ago

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 14y ago
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.

fredBuddemeyer 14y ago

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 14y ago

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...

at-fates-hands 14y ago

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?

unreal37 14y ago
No, the role of a CFO is NOT to manage the investment portfolios of stockholders. I own FB shares. I think the company will figure out a killer revenue model like Google did. But I don't blame FB for the temporary loss in stock value and it's NOT their job to make the stock price go up. Their job is to make revenue and profits, and I want them to focus on that.
bradleyjg 14y ago
The CFO's goal is to make the _existing_ shareholders money, not (hypothetical) future shareholders. As of the IPO it was in the interest of the existing shareholders that the company get as high a valuation as possible. If the CFO deliberately acted to benefit future shareholders at the expense of current shareholders he'd have violated his fiduciary duties.
jpdoctor 14y ago
> 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.

AngrySkillzz 14y ago

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.

opinali 14y ago

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.

spinchange 14y ago

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?

jmount 14y ago

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-ctrs-on-facebook-sponsored-results-ads-exceeding-3/ http://techcrunch.com/2012/08/30/party-like-its-1990-some-ct... ). 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.

001sky 14y ago

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

phomer 14y ago

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 14y ago
How did they trick people? Genuinely curious...

gamble 14y ago

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.