The Facebook Affair

Facebook Saves Face, But Did America?

by Bill Sardi

Recently 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 at 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 capital market…"

Wall Street 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?

Unfortunately 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 can't 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 stagnation?

The Facebook IPO was the the 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'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?

Rigged, 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" stock scheme.

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.

NASDAQ delayed 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 these days.

Then, another 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.

And there 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:

But…. they 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 constraints, etc.

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."

Yet another online WSJ commenter said:

…. my issue with Facebook is that in the u2018olden 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 – u2018you 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 was created."

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.

Facebook's Objective

According to 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 what?

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?

This time, 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?

The question 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.

Facebook is 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.

To solidify 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 on that.

Then, according 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. How absurd!

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.

Mr. Zuckerberg made billions off those baby pictures and now he wants more!

Facebook has 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.

With Asians 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 pathway.

So just what new acquisitions are we likely to see? Should FB buy up and Steam (a game site)?

Facebook's One-Sided Business Proposition

Facebooks's 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."

Asked another 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."

This isn't 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, not others.

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.

What is Facebook giving back?

Since Facebook 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.

Facebook: 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. Jobs.

Don't forget 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.

America: Yearning For A New Tomorrow

America is 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 fees.

America desires 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 America's agony?

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.

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