Mark Zuckerberg's Big Facebook Mistake 418
Hugh Pickens writes "Nathan Vardi writes in Forbes that in the last two months, Mark Zuckerberg has had a rude introduction to the capital markets. With Facebook's stock in free-fall, down more than 40% from its IPO price, Zuckerberg has a big problem. 'Zuckerberg did not want to deal with the pressures of being a public company. Like many entrepreneurs these days he viewed the capital markets with suspicion,' writes Vardi. 'So Zuckerberg made a fateful decision, he decided to keep Facebook a privately-held company for much longer than other success stories like Google or Amazon.' But waiting eight years to conduct an IPO has turned out to be an impossible problem to manage. The bankers at Morgan Stanley applied all the lessons of the last 15 years and priced the IPO at $38, which was very aggressive, in an attempt to avoid leaving any money on the table and the embarrassment that a huge IPO pop would represent. With such a big valuation at IPO time, Facebook had to show some results. But the numbers that Facebook announced in its first quarterly earnings report were underwhelming and the trading hordes drove Facebook's stock down by 15% in Friday morning trading. Now the early institutional investors are heading for the exits and it's hard to imagine morale at Facebook won't take a hit that correlates with the loss in value of the shares belonging to the employees. 'The lesson of the Facebook fiasco for Silicon Valley is clear. Start-up entrepreneurs cannot evade the discipline of the capital markets any more than can the prime ministers of Spain and Italy.'"
Re:Reality bites (Score:5, Informative)
There are always lawsuits in any big IPO.
I fail to see how any of this is a problem for MZ, or even out of character for him... he effectively (intentionally or not) suckered the market for much more money up front than Facebook is turning out to be worth. If FB were "priced right" at IPO, it might "perform better" but I don't see how that has any positive benefits for the pre-IPO shareholders.
TLDR: Not a problem for Zuckerberg, just a problem for anyone who bought FB shares.
Re:Shame on Morgan Stanley (Score:5, Informative)
Wall Street greed strikes again. I'm just glad that I wasn't stupid enough to invest. My off-the-cuff valuation would have been somewhere around $5/share.
And just last year, we were on Slashdot ( http://yro.slashdot.org/story/11/01/18/004226/goldman-sachs-says-no-facebook-shares-for-us-investors [slashdot.org] ) debating the merits of Facebook allowing direct investment without being publicly traded, specifically how small investors in the US couldn't buy into facebook due to them being privately held. A number of "insightful" posters waxed theological about how "overprotective" the US investment system is for having a restriction like this. I hope those wise investors got the opportunity to throw their money in back when Facebook was a $100B company...
Re:The sad thing is... (Score:5, Informative)
Yes, but the ruinous part is that they will keep trying. A steady reasonable profit is functional for a privately held company, but a publicly held one will be under constant pressure to improve quarterly earnings, and in the medium run, will undermine the existing profit structure to suit outside investors with no actual understanding of the company.
It's a culture of failure that large U.S. corporations have developed, and the only one immune seems to be Apple(who mostly seem to worry about increasing par value of stock).
Re:Wait, what? (Score:5, Informative)
They sold all the stock didn't they - to greedy investors who thought it'd go shooting up the day after IPO and they could make a killing flogging their stock (which I think all the institutions did), or stupid investors who thought that FB is the new paradigm and would take over the world's communications.
Either way, who cares? The only ones I see whining are those who bought the stock expecting to make easy money. The IPO price was obviously set at the right price as there was enough demand.
As for FB itself, it's still a private company, old Zucker didn't want any pesky shareholders (ie company owners) voting on what to do so all that stock is (IIRC) non-voting. So apart from a huge pile of cash taken from the stupid and/or greedy, nothings changed.
IPO basics; the banks got screwed, not FB (Score:5, Informative)
The bankers at Morgan Stanley applied all the lessons of the last 15 years and priced the IPO at $38, which was very aggressive, in an attempt to avoid leaving any money on the table and the embarrassment that a huge IPO pop would represent.
That's not how it works: FB sold its stock at $38 to the underwriters (the banks), who assume the market risk and sell the stock on the market. It's in the underwriters interests to pay the company a low amount, and see the valuation rise in the market. Companies want a higher valuation, and a jump in the stock price does NOT profit them. When the valuation was raised to $38 at the last minute, it was good for FB and bad for the banks.
I can only assume this fundamental aspect of IPOs is ignored because it doesn't make for a good story.
http://en.wikipedia.org/wiki/Initial_public_offering#Pricing_of_IPO [wikipedia.org]
Re:Maybe i dont get the stock market. (Score:4, Informative)
It doesn't directly impact the company. However:
1. It affects employees of the company, because employees of a company tend to hold a disproportionate share of their long-term savings in company stock and options.
2. A public company's board of directors is usually elected by the shareholders. If the shareholders view a falling share price as a sign that the company has problems, they may work through the board (or replace the board) to change the leadership of the company. This is less of a concern with companies like Google and Facebook since the founders own enough shares that they can withstand that sort of pressure.
Re:Reality bites (Score:5, Informative)
I don't know the numbers by the IPO. But here were the numbers in 2010. Stock plus estimated value of all holdings.
Mark Zuckerberg: 24%, $5.3 billion
Accel Partners: 10%, $2.2 billion
Digital Sky Technologies: 10%, $2.2 billion
Dustin Moskovitz: 6%, $1.3 billion
Eduardo Saverin: 5%, $1.1 billion
Sean Parker: 4%, $880 million
Peter Thiel: 3%, $660 million
Greylock Partners: ~1.5%, $330 million
Meritech Capital Ventures: ~1.5%, $330 million
Microsoft: 1.3%, $286 million
Li Ka-Shing: 0.75%, $165 million
Interpublic Group: 0.5%, $110 million
Adam D'Angelo, Matt Cohler, Jeff Rothschild, Chris Hughes and Owen Van Natta: 1%
Re:Billionaire. (Score:5, Informative)
He's already sold over a billion dollars worth of Facebook stock. Zuckerberg is a billionaire in cash money.
Zuckerberg has full control of Facebook (Score:5, Informative)
Zuck cannot lose control of the company unless he chooses to. His interest is majority and fully controlling. The board is advisory at best, impotent otherwise.
The following are crucial snips from the S-1 filing:
Our CEO has control over key decision making as a result of his control of a majority of our voting stock.
As a result of voting agreements with certain stockholders, together with the shares he holds, Mark Zuckerberg, our founder, Chairman, and CEO, will be able to exercise voting rights with respect to an aggregate of xxx shares of common stock, representing a majority of the voting power of our outstanding capital stock following our initial public offering. As a result, Mr.ÂZuckerberg has the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation, or sale of all or substantially all of our assets. In addition, Mr.ÂZuckerberg has the ability to control the management and affairs of our company as a result of his position as our CEO and his ability to control the election of our directors. Additionally, in the event that Mr. Zuckerberg controls our company at the time of his death, control may be transferred to a person or entity that he designates as his successor. As a board member and officer, Mr.ÂZuckerberg owes a fiduciary duty to our stockholders and must act in good faith in a manner he reasonably believes to be in the best interests of our stockholders. As a stockholder, even a controlling stockholder, Mr.ÂZuckerberg is entitled to vote his shares, and shares over which he has voting control as a result of voting agreements, in his own interests, which may not always be in the interests of our stockholders generally. For a description of these voting agreements, see "Description of Capital Stock-Voting Agreements."
Controlled Company
Because Mr.ÂZuckerberg controls a majority of our outstanding voting power, we are a "controlled company" under the corporate governance rules for publicly-listed companies. Therefore, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, our board of directors has determined not to have an independent nominating function and to have the full board of directors be directly responsible for nominating members of our board. Additionally, as described in the section entitled "Description of Capital Stock-Anti-Takeover Provisions-Restated Certificate of Incorporation and Bylaw Provisions," so long as the outstanding shares of our Class B common stock represent a majority of the combined voting power of our common stock, Mr.ÂZuckerberg will be able to effectively control all matters submitted to our stockholders for a vote, as well as the overall management and direction of our company.
Re:Reality bites (Score:4, Informative)
Anyone who bought GOOG at $100/share seems to be sitting pretty happy right now...
Not that Google's IPO is a good model for the Facebook IPO, but just so you're aware that there is at least one IPO with a ridiculous PE ratio that could be considered superficially similar.
Re:Not Too High (Score:4, Informative)
How can you possibly say it was priced too high? If all of the shares Facebook was selling were bought by someone at $38, then that was the correct price.
You realize that initial covering of this price was required by their underwriter, Morgan Stanley [1]. They were basically sustaining the price at $38 all of opening day.
[1] http://business.time.com/2012/05/22/facebook-ipo-fallout-four-lessons-from-a-troubling-public-debut/ [time.com]
Re:Not Too High (Score:5, Informative)
So let me get this straight? According to you then the housing market was not overvalued 6 years ago? Pets.com and isellyoucrap.com were also valued fairly and accurately because the IPO for these companies were like $70 a share?
I never said that Facebook was worth that amount. I don't remember using the words value or worth at all. I just said it was not priced too high. Pets.com or AnyNumberOfOtherOverpricedCompanies.com were not overpriced either if they found buyers, even if they were never worth what they were priced at.
All of those houses that sold for $400k were not overpriced, even if they are worth $300k now. They were never worth $400k, but they were correctly priced at $400k if they found a buyer. Setting a price only has to do with how much money you can make selling something, not what the actual value of the product is.