Karlgaard on the Facebook IPO

Rich Karlgaard of Forbes has some thoughts on the Facebook IPO. Best line:

Zuckerberg’s view of shareholders is like President Obama’s view of blue collar workers. He needs them but secretly laughs at them.

Not sure this is totally fair to Zuck (completely accurate as far as Obama goes), but pretty funny.

Note especially Karlgaard’s comment about the impact of Sarbanes-Oxley on public market investors:

The insider pig pile of PE firms and celebrity Silicon Valley angels took it all. This is a rather new, post-Sarbanes-Oxley fact and it should make Americans very, very angry. When Microsoft when public in 1986, its market value was $780 million. Microsoft’s market value would rise more than 700 times in the next 13 years. Bill Gates made millionaires of thousands of ordinary public investors. When Google went public in 2004 at a $23 billion valuation, it left less on the table for you and me. Still, if you had invested in Google then and held your stock, you would be sitting atop a 9x return. Zuckerberg and his Facebook friends took it all.

18 thoughts on “Karlgaard on the Facebook IPO”

  1. Isn’t that usually how IPOs go? Frothy then drop? Google seems to have been the exception. Still don’t see how Facebook is supposed to make the kind of money the IPO would suggest.

    Well Bono is doing OK. Laughing to the bank while trying to find tax havens, and tell us that we should give more.

  2. “took it all” my left butt cheek.

    They made the company what it is, whatever they could get for it on the “open market”.
    In a rare fit of honesty, the company IPO was valued at or near market. As it should be.
    Why should the “chosen few” Wall St brokerage friends get to ‘wet their beak’ and make an instantaneous profit? You must be BFF with the issuing firm, the one that handles all the IPO affairs, to get access to any IPO at issuance price.
    If you are their friend, they may offer you a chance to purchase IPO shares at the issue price, and make an instant pile of money without even having to invest. In most worlds, this activity would be considered akin to printing money. Under value the share price, and take the profit for yourself.
    Why shouldn’t Facebook get true value for its shares? As noted, shareholders are suckers, especially if they buy IPO above issue price. Who is left with Netscape at $150/share? The sucker that bought it last. Meanwhile, though that company may be gone, the money made on their IPO is still in the pockets of those allowed to buy at IPO price. Not the worker bees who made the company what it was…

  3. “They made the company what it is, whatever they could get for it on the “open market”.”

    Depends who “they” is. Employees and early investors, correct. Those who purchased stock traded privately over the last year or so, not so much. Note that SecondMarket, where FB shares were trading pre-IPO, makes stock sales available only to “accredited investors,” as required by the SEC. (“Accredited investor” is defined as a function of an individual’s income/net worth.)

    Karlgaard’s main point is that the requirements of Sarb-Ox have resulted in companies remaining in private status for much longer, and that this isn’t a good thing.

  4. Placing a $100B market cap on a service that is essentially frivolous is dangerous. Not even Disney, the epitome of frivolity, has a market cap that high.

  5. I am still kicking myself over the Microsoft IPO. This one is another AOL. I frankly don’t see the business plan. When I can’t understand the business plan I stay away or plan to lose money.

  6. When Google had their IPO I “wisely” decided to wait until things settled down.

    Still waiting.

    But, Google seems to be the exception.

    I don’t know if Facebook will be another AOL – AOLs problem was so many competitors becoming ISPs – Facebook seems to have reach “critical mass” on social websites (is something coming along that will cause people to leave en masse?) – but how are they going to make money?

    I finally (last week) went onto Facebook to join this particular group – gave them no information – and a pic of my dog for the avatar.

    BTW what did AOL do to over inflate the value of their stock and take over Time-Warner?

    Talk about the mouse that roared.

  7. Bill, don’t feel so bad you have plenty of company.

    A lot of the early internet company’s IPO’s didn’t do so great. Netscape did but I just looked at Yahoo to refresh my memory and it went down substantially from it’s opening price post ipo. It wasn’t until Spring of 97 that they all took off. I was working for a firm trading equity options at the time and we just looked at each other going wtf. This was in SF and I was a religious reader of wired and sites like ZDnet so it’s not like I didn’t understand the implications of the internet.

    Aol is funny because the problems you mentioned were well known but only acknowledged by a few. People will form expectations based on current signals when faced with accurate information about the future and ignore it until information proves accurate. Investors just didn’t want to believe that this wonderful business with growing users, revenue and profits could be bankrupt in 5 years. A lot of this is that it was driven by new investors which typically feed most bubbles. If you look at the experimental literature, bubbles often form at the beginning of the “trading game”. People learn how it works as they move along and the bubble shrinks and shrinks as it is replayed. Even professional traders had a bubble when playing it although not as large.

  8. is something coming along that will cause people to leave en masse?

    Well, FB keeps trying to do that to themselves, but so far hasn’t succeeded.

  9. @Bob – last weekend I went with my car club to Filoli Mansion – an interesting place in the SF Peninsula – site of many movies – and afterwards had lunch at Bucks Restaurant in Woodside.

    Reason I mention this is that Bucks is where “Larry and Sergei” – rebuffed at their efforts at trying to sell their better-web-search algorithm program to all the established search companies – like alta vista and Yahoo – anyway over lunch here they decided to start Google.

    Our waitress was interesting – we are talking about High Tech and she said at another restaurant where she worked she noticed Marc Andreessen always scribbling stuff while having lunch.

    Of course he went on to form Netscape – I supposed one of the first – if not the first – web browsers – copied by Microsoft – billionaire to “who was that again” in 10 years.

    I mentioned to her visiting my friend in Milpitas – seeing these huge magnificent buildings with high tech names I;’d never heard of – empty and for sale in 5 years.

    So much of the value of these companies is based on hype and speculation about “what they will do” – and I’m thinking too of biotech. Of 100 or so biotech start ups , only 1 or 2 – Genentech is one – are still around.

    All based on promises for the future and selling at crazy price-earnings ratios.

    BTW I bought Yahoo 15 years ago – with good mgt and foresight **they** should have been where Google is.

    Burt I still hold it, waiting for their big turnaround ;-)

    Their dividends keep me with them ;-)

  10. Bill B…”BTW what did AOL do to over inflate the value of their stock and take over Time-Warner?”

    Aaaand guess what I just found…an Industry Standard (magazine) from 2000, with the cover story “AOL’s Steve Case and Time-Warner’s Gerald Levin have engineered the biggest deal ever.”

    The article said many AOLers and AOL shareholders didn’t feel THEY made out well enough on the deal, given the comparison of their company with staid old TW. Big public-policy concerns were cited: the danger that the combined company would be “a Tasmanian devil, ceaselessly destroying everything in its path.” (I don’t think they were referring to stock values.)

    Synergy was hyped: “Just as if TW had inherited a worldwide chain of movie theaters guaranteed to give its films first run, Tim’s programming will get prominent placement on devices like PalmPilots and cell phones, as AOL begins to push its AOL Anywhere campaign.”


  11. David, Ted Turner is unprintable when talking about that merger. He had lost control of TW but still had a lot of stock. I think he said it cost him a billion dollars.

  12. @David
    I know as of a few years ago AOL value is so laughable there was talk of splitting up TW (if they aren’t already) – how they could do that I don’t know. I don’t know exactly how AOL managed it but I think from an accounting standpoint their stated value bordered on fraud.

    In re: Ted Turner – you see it isn’t just us little guys that can get the shaft ;-)

  13. Shale folks. Shale. Mind you it involves something real, and you won’t necessarily be a billionaire overnight or even in 10 years.


  14. >> but how are they going to make money?

    The elephant in the china shop, sir.

    Selling peoples contacts and interests? mmmmm, warm and fuzzy, yeah. That one won’t fly.

    I suppose there’s probably a market for aggregate demand of trends and interests that is outside of individually specific information. This is at least part of Google’s revenue stream, so there’s clearly a market there.

    Just mining what people choose to “share” — especially when interlinked (i.e., “people who shared this also shared that…” is not exactly trivial knowledge to sell.

    Along the same lines — if they want to mine actual post content sans identifying info — a search for “President Downgrade” almost certainly marks a negative opinion of The One and, from that, one could note “people who dislike the current PotUS shared this and that most commonly….”

    Expand on that with HUNDREDS of millions of people and you get Real Knowledge of trends. It would not amaze me if you could probably predict the outcome of the election NOW with some accuracy with the right algorithms — possibly not available YET but after an election cycle or two that might become pretty functional well in advance.

    Knowledge is power.

  15. >>> Synergy was hyped: “Just as if TW had inherited a worldwide chain of movie theaters guaranteed to give its films first run, Tim’s programming will get prominent placement on devices like PalmPilots and cell phones, as AOL begins to push its AOL Anywhere campaign.”

    I believe all that was largely based on the notion that was being sold at the time, that “Push” would work on the internet. It still might but “mass push” won’t. People’s tastes are too eclectic, and finding a match for all of them is hardly trivial. One can find all sorts of Wired articles in the 90s about the future of “push” on the internet.

    One function of the information age is the fragmentation of the market. For every Avengers there’s 15-50 other movies that don’t, or barely, make back their production/distro price. Smaller, niche markets abound, which is why there’s more success for the HBOs, the USAs, the SpikeTVs than there is for The Big 3 or 4. Fox barely holds its own, while NBC already tried to find another niche to fill, and failed (“Talk TV”). Only CBS manages to steadily keep its finger on the zeitgeist.

    So the whole notion of Mass Push that the AOL-TW idea was based on was severely defective (and as I would have maintained at the time, if I may toot my own horn).

    It was based on wishful thinking that the mass-market channels developed in the 50s, up through the 90s, based on limited bandwidth, would continue to hold appeal in a time of unlimited channels for receiving information — indeed, even channels are largely weakened, as I may be fragmenting my attention — doing this while watching a TV show while downloading something for later use. So why would I want someone ELSE who knows little about me, telling me what to pay attention to? It’s just ludicrous on the surface. I do have means to select what I direct my attention to — if an author I like recommends another author, I give that opinion weight — but that’s a 100s-to-1 or 1000s-to-1 appeal — WtF is with someone thinking they can direct a consistent stream of “this is interesting” to MILLIONS? It could only happen in the 50s-90s when people didn’t have any choices. They have choices now.

    Push was dunderheaded from the start.

  16. >>> BTW I bought Yahoo 15 years ago – with good mgt and foresight **they** should have been where Google is.

    LOL, with “good management and foresight”, there are no less than four companies that should be where Microsoft is:

    a) Apple (They Coulda Been a Contender — written before Apple’s iPod resurgence§)
    b) Digital Research (GEM/Borland — they had all the parts for “Windows” before M$ had ’em)
    c) IBM (yes, ca. 1995 — W95 was seriously delayed, and if IBM had parlayed OS/2 Warp how they should have, they would have taken over the market)
    d) Netscape (Their Rodney King “Can’t We All Just Get Along?” business strategy did not work in the face of M$’s “KILL THEM ALL!” strategy)

    Now Google is about to eat their lunch, because of “good management and foresight” as they leverage the shift from personal computing to smartphones and tablet computing, via Android, to take over the market of the underlying OS on user machines.

    That’s *four* companies who screwed the pooch. “Good management and foresight” at that level is hardly common. My own personal joke has been that Bill Gates somehow located The Shadow’s Ring, with its “power to cloud men’s minds”.

    §What’s even more hilarious is that Apple never learned a damned thing, something I contend is inherent in its liberal nature of never ever learning a damned thing from experience. They could have pwned Microsoft a second time with the iPhone and the iPad, but they don’t grasp that you don’t win The Big Prize by keeping a tight control on your market, but by letting go and “riding the wavefront”.

    Instead, Google will do it, as Android-on-smartphones is well ahead of Apple’s iOS, and I predict that Android pads will overtake the iPad within 2 years, probably sooner if Amazon has their way. The next Xmas may well be telling in terms of how long Apple has (they may gain a respite by introducing a new “Gee Whiz Ain’t It Cool” thing to create a new market again — something they ARE incredibly good at… there are rumors about “Apple TV”, we’ll see. I personally put more stock in Google’s “Glosses” idea. It frees up the smart phone and pad from having a “fixed size” screen and allows the boxes to continue to shrink, rather than increase in size as they’ve been forced to do of late. The fact remains, an output display really does need to be able to subtend at least 10-20 inches of width at 3′ distance — about 31 degrees or so as a minimum ideal. That’s just not practical on a portable device with a fixed screen. The “Glosses” idea does a nice end-run around that by disassociating the screen from the computer itself.

    NOW we can really get those Dick Tracy wrist-communicators we’ve been waiting for. Yes, there are all manner of issues, both safety and social, which need to be addressed in the first decade of use, but that’s an inevitable result of new technology — such as not texting while driving, or NOT TYPING IN ALL CAPS. :^D

    Note: In no case will Windows make a dent on the phone/pad market — too many tech people hate M$, and the tech people lead such market too strongly, even if it weren’t too late already, which I believe it is. The only good “smart” phone is the one that doesn’t have Windows on it.

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