The market doesn't care about your overpriced valuation (Failbook)

http://williamkasel.posterous.com/facebooks-failbook-ipo-or-how-silicon-valley

by wkasel • 14 years ago

23 49 14 years ago

williamkasel.posterous.com

azat_co• 14 years ago

Nice article, William! :)

wkasel11• 14 years ago

Thanks Azat!

ChuckMcM2• 14 years ago

Seems a bit snarky to me. Engineers don't price IPOs, bankers do. And because of that it reads more like

"I'm really pissed off you are now rich and I am still not rich."

or perhaps

"I thought it was going to go through the roof and so I bought some and it didn't so I lost a lot of value and now all this stuff that I'm reading makes me look stupid for having believed it in the first place."

I've mentioned elsewhere that when I read stuff like this I feel sympathy for the Author because I think they might be in a lot of pain over something and trying to work through it. Not everyone has good tools for that, sometimes just screaming at the top of your lungs makes you feel better.

As a person who lives in Silicon Valley and could easily be painted by William's broad brush strokes as someone who "has their head so far up their ass that they are eating their own bullshit" I regret to say that I've not lost (or gained) any money on Facebook stock, don't own a single share, and like a lot of people here don't own it because I didn't feel it merited a price over $30 a share. This isn't because I'm a genius and or smarter, its because I looked at the business and said, "You know I don't think it supports that valuation."

But that said, its a hell of a business. Facebook made over a BILLION dollars last quarter, that is over four billion a year at those rates. I was at Sun 10 years and it just just crested $3B on its ways "hopefully" to $5B and folks were estatic. It is pretty impressive what these Facebook folks are doing.

But what William is so upset about is its stock price. And to that I'd say why the hell do you care what the price of Facebook's stock is? What does it matter? Smarter people than you are evaluating it every day and making bets on whether its priced higher or lower than its future value, as they play that game they exchange money, it's sort of a score keeping system with them, and they have more strategies than a roulette player has ways to "beat the house."

Now if you're an executive at Facebook you care because it limits your options when it goes down, as an employee maybe it changes the model plane or boat you can buy, as an outside observer it means nothing. So why the angst?

wkasel11• 14 years ago

Interesting assessment. I live in Silicon Valley, I don't own a share of FB, I do trade frequently. Like you, I made an assessment. My frusteration comes mostly from reading on tech blogs what Facebook "needs to do". Techcrunch acts like they are Bloomberg or something, which goes exactly with my broad brush stroked point as you said.

It's actually the valuation I care about vs. the stock price, but people tend to understand that better, so I use that as a unit instead of valuation.

The bottom line is yes, I write pointed, and passionately, I'm not personally at a loss for FB, I'm just tired of hearing "expert opinions" even on Bloomberg.

goodcanadian4• 14 years ago

My only comment is that if you can make an overpriced IPO, that is good for you. It is bad for the suckers who were dumb enough to buy in, but that is a different story. If the share price goes up quickly after an IPO, the price was too low. If the price goes down quickly, it was too high, but why should you care? If you want to pay me $1.50 to buy $1 bills, I will sell as many as you will take. The current market valuation only really matters when you want to trade. Otherwise, worrying about your stock price is a bit of a pissing contest. BTW, I did not buy Facebook or Zynga. They were both pretty obviously over-hyped and overpriced (it seems most IPOs in most industries are), but the stock holders prior to the IPO made out like bandits during the IPO.

wkasel11• 14 years ago

Logical explanation, however the point of an IPO is not just liquidity in for your employees, but also to raise money for the company, and allow the public to buy in. If you don't price it so the price goes up, then you're doing everyone, even your shareholders a dis-service because they have a 180 day lockup period, so when the stock is at $15/share at the end of lockup, you actually screwed employees as well. The only person who actually made money on this was Merrill Lynch.

goodcanadian4• 14 years ago

Facebook got a huge injection of capital at very favourable rates which was good for all holders prior to the IPO. I understand that it might be disappointing to see your stock go from $38 to $15 over the lockup period, but my point is that it was never worth $38 in the first place, so by getting new buyers to pay $38 for a $15 stock, the current owners increase the real value of their own stake for free.

I will agree, however, that the biggest winner is and probably always will be the investment bank. Well . . . sometimes the bank loses, but not very often if they do their job right.

wkasel11• 14 years ago

Fair, but the only problem I see with your reasoning is stock grants were being issued as far back as 18 months ago at $25/share, which means that those employees DID lose money.

thebmax• 14 years ago

I believe that Peter Thiel, Accel Partners, and several other early investors sold a considerable part of their shares in the IPO.

That being said, I agree with your article and you make lots of good points!

robbiep7• 14 years ago

I feel like this article misses a number of points. Firstly, the modern IPO is chiefly about giving early investors and staff an exit ticket. It is therefore in their interests to price it as high as possible. The fact that there was significant hype around the business meant that they were able to achieve this valuation. The fact that this is distinct from the original aim of the sharemarket - that is, capitalising firms to create new ventures (Think infrastructure - the golden age of rail, factories, etc) is an interesting side-note.

Secondly, the marketplace often operates on the stupidity of the masses. Intelligent fund managers stay away from overpriced IPOs, the uninformed masses pile in because they hear the hype and are not value investors so don't know/care that the revenues aren't behind the company.

3- A successful IPO is one that is fully capitalised and gives the company new cash. It is not one that goes through the roof. This would represent a failure of the Merchant Bank to properly capitalise on the company's value (They could have charged a higher value for the IPO as that would have better represented the fair value of the company) - in fact, in a perfectly valued company it should track mostly flat as the investor return is priced into the dividend + some accumulation of value.

The Facebook float, and the Zynga float, and numerous others, thus represents a good example of management and investment banks fully capitalising on the hype surrounding them to extract maximum returns for the early investors. The fact that this screws later investors is secondary.

wkasel11• 14 years ago

With all due respect, I completely disagree. If you understand the fundamentals of an IPO, as I explained below you would know that there is a 180 day lock-up period for employees, this means that employees haven't been able to sell their stock yet. When they do sell their stock it will be at $10/$15/share. The only folks who made money on the IPO were Merrill Lynch who SHORTED IT!

You're typically supposed to IPO at the point you are preparing to grow. Not flatline. Your original argument is exactly what I'm saying is the misguided philosophy of Silicon Valley, and the Tech Community as a whole. Again, no offense, but step back and look at what I just said. I have a point. This IPO fucked everyone, including Zuckerberg, employees, and anyone else who still holds shares which as I said above is every single employee.

anewguy• 14 years ago

Presumably the company has plans to invest the cash raised in the IPO to generate positive returns.

epistasis3• 14 years ago

No, that's wrong, the only way an initial overvaluation hurts pre-IPO investors is if the stock gets delisted, or the market is so offended that it starts caring and undervalues the company. Otherwise, employees are just fine; Since the market doesn't care, it gives them fair value when they have a chance to sell. They lose out on cashing out during the over-valuation period, but that was just free money for those that pulled the strings, pre-IPO investors and Facebook management that could sell at IPO

The only people hurt by the initial overvaluation were the people that bought high. Everybody else wins or is neutral. Everybody. Again, unless the market starts caring about retribution and undervalues them. Otherwise everybody gets exactly what the market will give them.

The ibanks, Zuckerburg, and initial investors that sold on IPO day or shortly after, all win by a huge margin. They pulled the wool over lots of people's eyes; perhaps not intentionally, perhaps they honestly believed their own bullshit, but in any case their irrational exuberance hurt them not one bit.

robbiep7• 14 years ago

I agree with your point about every techcrunch etc saying what 'facebook NEEDS to do' - as if you can judge the failure/success of a company 3 months post IPO on the value of a stock.

I continue to disagree with you about this fucking Zuckerberg/Employees etc. They have turned paper money into real money. They have lost - psychologically - some unreal money in their freeze period (BTW I was not aware of this, I am much more familiar with Australian securities law). The ~70 Billion of shares from outside investors (Guestimate, I don't know how much stock was retained by employees) - has capitalised the company however, and these are the people who are getting b*tchsplapped by the invisible hand.

With regard to IPO as you are preparing to grow - yes. But that just highlights the nature of IPOs in a bubble. As another poster said, they have managed to significantly capitalise the company despite the fact that rational investors have subsequently brought the share price back to something that (they consider) is more properly the fair value. the idea that a shareprice should skyrocket post IPO is a fallacy that goes against the Efficient Market Hypothesis - i.e. that in the long run you can't achieve returns that are greater than the average market return. This same fallacy is what most 'uninformed' investors are investing in the market under - and it is the existence of these investors that allows informed investors to make a killing on their behalf - in this case, Merrill (and assumably lots of others) by shorting the stock.

h1srf• 14 years ago

Merrill shorted FB at the IPO? I seriously doubt that. First of all, I don't think there would be enough inventory to borrow for a few days. Secondly, the borrow cost would have been astronomical for those first few days. There was a WSJ article that talked about the borrow dropping from 40% to 6% about a week after the IPO. Are you talking about that period?

aniro2• 14 years ago

In this case "extract maximum returns for the early investors" means that a whole lot of people got ripped off.

The notion that "the modern IPO is chiefly about giving early investors and staff an exit ticket" is a near perfect example of how "Silicon Valley, I hate to say it, has its head so far up its ass that it's eating its own bullshit."

The investors purchasing Facebook at IPO and after are not looking to reward early investors or hand some sweet exit to a founder.. they are looking for a return on their investment dollars.

If this is the prevailing attitude regarding the purpose of capital markets in Silicon Valley, I would be shocked if the IPO market for new tech stocks didn't shrivel up and die in the next (last?) few months.

How odd that there is an excellent article sharing the front page about American "Looterism" replacing American Capitalism.

wkasel11• 14 years ago

Well said. You're exactly right. I didn't cover it, but the larger concern I have here is that this misguided approach could lead to distrust from wall street of any tech IPO's that aren't enterprise, or low/mid cap.

PaulHoule• 14 years ago

SV was the leader in social media three years ago but today the interesting companies, like Pinterest, are run out of places like Iowa.

rdl• 14 years ago

I think the people who work at Pinterest's HQ in downtown Palo Alto would say they're not in Iowa anymore.

RockyMcNuts• 14 years ago

Blodget made some good points:

http://www.businessinsider.com/facebook-lockup-release-2012-...

You want a high IPO price, but not so high that you can't meet expectations and disappoint. Get tagged as an underperformer and it makes it hard to do future stock acquisitions, financings, hires.

pbreit4• 14 years ago

This is a stupid argument. The character "flaws" the author cites are basically why much of the technological progress of the past several decades originated in Silicon Valley.

wkasel11• 14 years ago

Let's not use the word stupid. I live and work in this ecosystem. If you saw what I saw you would agree.

pbreit4• 14 years ago

You're lecturing me about language? I've seen as much or more and I think "stupid" is the correct word. The supposed "flaws" you mention are the exact attributes that have made Silicon Valley the originator of much of technological progress in the past few decades. Selecting a once-in-a-decade company to extrapolate from is, well, stupid.

joshuahong100• 14 years ago

Wow.. to the top level commenters who rationalize the merits of the Facebook IPO as successful in extracting the maximum amount of money for investors and employees.. this is the type of logic that warrants the criticisms thrown at Silicon Valley.

Not withstanding the fact that the redistribution of wealth was based on 'hype' and just a douchy move, does no one seem to understand that the IPO market will inexorably implode yet again through such self-serving actions, thereby closing future IPO opportunities for companies with real revenues and growth?

The market doesn't care about your overpriced valuation (Failbook)

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