Saves Face, But Did America?
by Bill Sardi: Growing
Up Poor Helped Make Me Rich
There was something
bigger at stake last week when Facebook launched its initial public
offering (IPO). Some commentators said the credibility of the markets
were at risk. The Facebook IPO had been so overhyped around the
world that Wall Street just couldn’t let this one fail. Its underwriter,
investment bank Morgan Stanley, ended up propping Facebook’s stock
at the end of its initial Friday trading day. Its starting price
per share was $38.00, its initial buy was $42.00, and its final
price was $38.23. Facebook saved face, at least for now.
But by the
following Tuesday, its 3rd day of trading, it’s stock
fell to $31. Some
analysts think Facebook should be trading between the $15-to-$18
per share price. How could such a long anticipated IPO fizzle
so fast? Facebook is a household name, not a wanna-be startup.
A blog posted
said: "And to think there was a time when an IPO simply
allowed a company to raise cash: sadly it has devolved to the point
where a public offering is a policy statement in support of a broken
was covering its rear end on a banner day when the world was watching,
but there was something even bigger than that in play.
It was whether
the newly fabricated American business model, built on revenues
from click fees and online ads, was going to take hold and produce
real long-lasting value or was it going to fizzle and tank the new
American dream along with it? The world has a seat to this venture
this time via the wonder of electronics. The stakes are a bit larger
due to the very interconnectedness facilitated by the likes of Facebook.
You could see
that dream on the faces of the three thousand FB employees, mostly
in their 20s and 30s, who were videotaped outside their headquarters
in Menlo Park, California, waving their arms in anticipation of
newly acquired individual wealth as they cashed in on their FB stock
options. These newbies were going to instantly join the ranks of
the 1%. Great for them – but good for America?
for the insiders, they can’t cash in just yet. In a required lock-up
tie, there a 1.2 billion shares on the so-called sidelines, that
be sold till November. For insiders, an excruciating wait begins.
Was the Facebook
IPO the much needed big step forward for America, something like
a "cure for cancer," that financial commentator Peter
Schiff once suggested America needs to pull itself out of its economic
IPO was the the dot.com bubble revisited, but this time the old
guard were promoting it rather than undercutting it as it did a
decade-and-a-half ago when dot.com’s posed a threat to American
aristocracy built upon industrial wealth. Is America going to see
an endless parade of these web-based companies launching IPOs, like
Twitter, which was surely taking notes as the FB IPO unfolded?
Is making money
by building airplanes and cars and computers on the way out, while
getting paid for the generation of click fees from viewing a Facebook
ad the new economy? Facebook is now worth more than General Motors
or McDonald’s. What does that tell us?
yes, but that is standard operating procedure these day
There was so
much talk by online contributors who kept harping over the fact
the FB IPO was rigged, that this IPO was just a "pump and dump"
Yes, but the
underwriter and insiders ended up holding the majority of a puffed
up Facebag, not little stockholders. Morgan Stanley, which supposedly
made a 1% fee to take Facebook public and garnered about $175 million
for that, had to buy up $6.16 billion, JP Morgan Chase $3.2 billion
and Goldman Sachs $2.4 billion of stock according to an article
in the UK’s Telegraph. Apparently there were just too few
retail investors to keep buying in the first 10 minutes to keep
the stock from sinking.
the start of trading till the European markets closed so as not
to taint this mother-of-all IPOs with the dreary investment environment
on the other side of the pond, and then conjured up some glitch
in its processing of trades to keep investors from backing out.
Detractors may complain, but that is the way the game is played
revelation – Nasdaq claims it would have called off the Facebook
IPO had it realized there were technical glitches in the exchange
that day. For unexplained reasons, there was a 17-second
period, just around the time the Facebook IPO was launched,
where all quotes and trades from Nasdaq listed stocks completely
stopped. Certainly Nasdaq couldn’t have missed that glitch. But
Nasdaq proceeded. In a world where milliseconds can mean billions
of dollars, that is a major glitch.
is more intrigue surrounding that first day of trading as the chief
analyst for Facebook at Morgan Stanley now stands accused of revising
forecasted sales revenues downward to institutional and major
clients just prior to Facebook’s initial public offering while retail
clients got word much later, after they had placed orders.
You can learn
more about the Facebook IPO and its meaning by reading the 500 posted
comments at the Wall Street Journal this weekend than by
reading the main
WSJ article about Facebook this weekend.
As one online
commenter, posting at the Wall Street Journal (WSJ)
said so succinctly:
are asking for $9 billion before they have really proved themselves.
It's too much. It smacks me as extreme overreaching. Why? – Because
of the overall size of this offering. And, as we have been hyped
for several years, this was supposed to be a very special deal,
their vision to free the world of communication and education
Politically, what they say they
want to do and now what they are doing are at opposite ends. They
should have sold far fewer shares with a future offering in mind
at higher prices. Why not $1 billion? Because they want it all,
they always have. This is an organization and culture built on
hubris. In short, you just can't ask for a $104 billion valuation,
then take a huge chunk of cash out at the same time. On this one,
it just doesn't feel right."
online WSJ commenter said:
…. my issue
with Facebook is that in the ‘olden days’ before the Google IPO
– insiders were locked up. They didn’t cash out like these guys
did yesterday. Insiders took $9.8 billion from public investors
yesterday – 57% of the money raised! There was something disgusting
about that.… There used to be a saying – ‘you ran a public company
just as much for the widow on Main Street with 10 shares as the
money manager on Wall Street with a million shares’. They actually
believed in the fiduciary duty back then. Not anymore…. At least
in the old days insiders stuck around until an orderly market
So who was
the real underwriter?
Now in this
financially interconnected world where derivatives and credit default
swaps drag every entity on the planet into every failed bet that
investment houses make, the question has to be asked, who really
underwrote the risk for the Facebook IPO?
As one online
WSJ commenter said: "Maybe Bernanke will buy it. There's
a lull between QE's, isn't there?" Precisely. If Facebook really
falls on its butt, Uncle Sam is likely to step in, at least covertly.
The largest borrower from the Federal Reserve in the 2008 financial
collapse was Morgan
Stanley, which borrowed $107 billion.
Mark Zuckerberg, Facebook’s CEO (who commandeers 97% of the voting
rights at FB and has become a $19.25 billionaire), the new American
economy, as defined by Facebook is: "to make the world more open
and connected." Goodie. We are all holding electronic hands. Now
As one online
WSJ commentator said: "The US stock market used to have IPOs
of companies promising to cure cancer, develop new energy sources,
and landing on Mars.
The new America has companies
promising faux friends and photo sharing…" And to think, we
are resting in the afterglow of that unprecedented IPO. But where
is it taking us? Where is that Pied Piper Mr. Zuckerberg going?
conceding that manufacturing is no longer the center of the American
economy and that buying Gucci bags at Nordstrom’s is, we all wonder
which doorway to the electronic consumer economy is going to prevail
– Amazon, Google, Facebook, or all three?
now is, what will Facebook do with the $7 billion it raised to add
value to the company? That question won’t be answered on Monday
when Facebook shares begin trading again. It will be answered by
acquisitions FB makes with its money.
In other words,
this is a partial admission that its current business plan is not
enough to keep generating increasing revenues over successive quarters
to build on the value of the company, which has revenues of $4 billion
and now has a market capitalization greater than $100 billion. Just
where can it go from here, many analysts ask.
Just what did
Facebook need more capital for? I mean, isn’t that why companies
go public, to use other people’s money when the future growth demands
of a company exceed existing financial resources? Facebook is no
startup, it is generating
$1.5 billion in cash from operations, $1 billion
in profit, $3.7 billion in sales, and had a 47% operating margin
in 2011, and over $3 billion in assets. But it needs to produce
100% growth to justify its stock price (yikes!). To do that it needs
new profit centers.
reported to have 845 million users as of Dec. 31, 2011. About 16.6%
of those users have clicked on a Facebook ad or in some other
way showed interest in purchasing a product.
In ad revenues,
Facebook makes $4.34 per user. To justify the $100+ billion valuation
of Facebook, the
projected ad revenues would have to top $20 per user, says one
economist. Google makes $30 per user. Facebook needs to pull a rabbit
out of its hat.
its lofty market capitalization, Facebook began the ramp up for
its IPO by increasing
its cost-per-click ads by 40%. But is advertising on Facebook
worth the money invested? Dr.
Pepper has gained a following on Facebook of 11 million and counting.
But it had to hire two agencies to try and figure out how to capitalize
to company insiders, Facebook softly suggests in the near future
it will be charging users a subscription-based
service with monthly fees beginning at $0.99 for basic "friendship,"
which allows for the posting of text and just one profile picture.
Fees will increase depending upon the number of friends you have,
messages posted and sent, and the pictures, videos and games placed
on a user’s page. There will be a $50.00 per month cap at the high-end.
Can you imagine?
The very people that just made Mr. Zuckerberg rich by freely contributing
their baby pictures to lure in family members are now going to get
charged for providing free content to Facebook.
made billions off those baby pictures and now he wants more!
capital, but obviously not enough to swallow some other big players
in the online electronic marketplace so it can demonstrate sales
growth to the investment community.
wanting more of what is American, China represents the largest growth
market. But that country is currently closed to Facebook.
A few more
quarters of unprecedented growth is all that is needed. Even if
Facebook can get another billion people on the planet to sign up,
it needs to sell them something, like computer games, vitamins,
something, not just lead people to those transactions via its advertising
So just what
new acquisitions are we likely to see? Should FB buy up Mercola.com
and Steam (a game site)?
One-Sided Business Proposition
business proposition is to lure everyone on earth to post up photos
of their grandchildren and provide free content so those newbie
millionaires who work for FB can brag of their success.
But that is
not a win-win proposition. It is someone else’s content (photos
of the grandkids) that is driving traffic to Facebook. Now if FB
were to offer shares or profit-sharing to those Facebook users that
actually contribute content, now that would be revolutionary. I
don’t know about the legalities of all this, but imagine Facebook
users being offered shares and 100 million of them buy up $1000
blocks each. That would come to $100 billion.
But as it goes
now, every invited blogger on the internet is providing free content
to drive traffic to a website that intends to make money off that
intellectual property that Facebook says it owns once you post it.
In fact, you can’t cancel your Facebook account once it is created.
At least Facebook
asks for permission to use it before you post it. Google went into
business by swiping everyone’s IP. Google snips everyone else’s
content (logos, artwork, graphics, photos) to generate its revenues.
Google made you and your enterprises better known. But it also gave
Google the captured right to license your trade names to your competitors
via AdWords and make money off of them.
Egg on Facebook:
What's The Business Model Again?
As one online
WSJ commentator asked: "I'm still waiting for someone
to point out how FB has made the world a better place."
online WSJ commenter: "How many people who made better
contributions to humanity ended their lives without a cent in their
pockets? This is another irony from the planet named Earth."
Mark Zuckerberg’s intention per se, to have a noble purpose. He
is just the front man for his backers. Put a 60-year old investment
banker up there to represent Facebook and all of a sudden it doesn’t
resonate with the newbie generation.
I know this
firsthand. A small company I captain announced a major discovery
just prior to the Facebook IPO. Researchers at a major medical meeting
said a dietary
supplement that my company makes could help older adults recover
lost vision that cannot be remedied by any other means. This
could save the sight of hundreds of thousands of senior Americans
and spare the insolvency of Medicare Part D from the burdensome
cost of drugs that are now used, sometimes ineffectively, for the
same purpose. But that discovery, like others, got overshadowed
by Facebook’s IPO.
Unless a discovery
like this is linked into the claws of the financial industry, it
won’t get any play by the news media, and it didn’t. That is just
the state of affairs in the world today. You can cure blindness
and it will be ignored until you take your venture to Wall Street.
It is a meaningless discovery until everyone else can cash in.
But I’m not
looking for Facebook to change the world. That is too tall an order
for the likes of a 28-year old like Mr. Zuckerberg and Company.
I’m just looking for it to offer a win-win business proposal.
How is Facebook’s
inner corporate culture, fresh from spawning a lot of new millionaires,
going to re-orient to the mandate that their number one job on the
Monday after their IPO is to make money for their stockholders?
It’s not ingrained in the culture. So far, it’s all about them,
All that Facebook
can brag about so far is that it hires 3000 workers and a lot of
them joined the 1%. But the 99% provided them with free content
to become rich. Their users didn’t even get a thank you. In fact,
it looks like they are going to get charged, just like those coal
miners who had to buy at the company store and owed more for their
living expenses than they were paid to mine for coal.
Facebook giving back?
itself doesn’t provide a product or service, just what does it propose
to offer? One purported advantage Facebook offers is that it puts
prospective consumers in touch with suppliers who offer discounted
pricing on auto insurance, consumer goods, etc. Sounds kind of like
one big Groupon coupon by virtue of participation in Facebook. True,
online venues provide a way for consumers to compare prices. But
this is not unique to Facebook. So what is its unique financial
benefit? If Facebook is to become a business rather than a faddish
scheme, it is going to have to grapple with what unique niche it
offers that can’t easily be filled by others.
An American Drama?
We are now
being swept up into the drama surrounding Mark Zuckerberg’s boring
life. Are we all supposed to regularly go to Mr. Zuckerberg’s Facebook
page and not miss a moment in his life? He invited friends and associates
to his home for a victory party the day after the IPO and they found
themselves at his unannounced wedding.
It seems like
FB now wants the world to get swept up in the Zuckerberg phenomenon,
a CEO who is going to be the subject of the next American drama
to play out online. Are we going to hold our breath to see where
he goes on his honeymoon? That would be totally Facebookish.
Somehow I can’t
foresee Mr. Zuckerberg unveiling anything like Steve Jobs did for
Apple in his new product introductions. And I can’t think
of anything memorable that has been uttered from Mr. Zuckerberg’s
lips. But it is probably unfair to compare Mr. Zuckerberg with Mr.
that shortly after Amazon went public its shares hit the $100 mark
and then dropped and hovered below that point for years as Amazon
attempted to gain market share. Today Amazon
is a $200-plus per share stock.
Yearning For A New Tomorrow
yearning for a new tomorrow. It desperately needs jobs and new technologies.
I don’t think Americans would consider massage therapist and Pilates
instructor as careers if there were better jobs available. Likewise,
if there were a true industrial breakthrough, let’s say some new
technology to transmit electricity across the energy grid in a more
efficient manner, America wouldn’t be hyping an IPO based upon click
young entrepreneurs of the likes of Mr. Zuckerberg. But is our desperate
financial situation making us see schemes like Facebook through
an over-forgiving lens? Will the ecstasy of the moment end up as
I can recall
a scheme called Shop America. It was a club buying service. You
made money off of others joining in. New members bought memberships
for their friends who bought memberships for their friends. It didn’t
last long. The Federal Trade Commission declared it to be a Ponzi
scheme. Everyone was so disappointed. They all wanted it to be true.
And we all want Facebook to be true.
better be a success. Governor Jerry Brown’s budget for 2012 already
has spent nearly
$2 billion from California’s anticipated tax on the gains to Facebook’s
him mail] is a frequent writer on health and political
topics. His health writings can be found at www.naturalhealthlibrarian.com.
latest book is Downsizing
© 2012 Bill Sardi Word of Knowledge Agency, San Dimas, California.
This article has been written exclusively for www.LewRockwell.com
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