| From: Glenn Petersen | 2/10/2012 2:05:14 PM | | | | | | The case for a $100 billion valuation:
A $100 Billion Value for Facebook? That May Be Possible
By STEVEN M. DAVIDOFF
DealBook
New York Times
February 10, 2012, 11:47 am
A hundred billion dollars. That is the number whispered for Facebook’s value after the social networking company has its initial public offering.
But some investment professionals are scoffing, claiming that Facebook is worth less, perhaps only $75 billion or the shockingly smaller $50 billion.
Even if the skeptics are right about Facebook’s true worth, it does not mean that Facebook stock will not trade at a price giving the company that vaunted $100 billion valuation.
The reason: Facebook’s underwriters led by Morgan Stanley are likely to be able to influence the market in Facebook shares to fulfill the buzz and reach that $100 billion number.
How can this be?
Henry Blodget, the former equity research analyst and current editor in chief of Business Insider, wrote an extended post last week about valuing Facebook. Mr. Blodget wrote that Facebook has an “absolutely amazing” business. But Mr. Blodget also concluded that just because Facebook was a fantastic business did not mean it was worth $100 billion. Mr. Blodget noted that if Facebook traded at Google’s 20 times price to earnings, or P/E, a common valuation metric, the company would be worth only $20 billion. Facebook is growing faster than Google, but even applying a higher multiple of 50 times Facebook’s P/E, the company would only be valued at $50 billion. Mr. Blodget concluded that $75 billion was an aggressive valuation for the company.
Of course, many may disagree with Mr. Blodget. Facebook has huge growth potential abroad, including eventual entry into China. The company is also likely to find some way to further monetize its mobile traffic and its user base, possibly by integrating ads into news feeds. Either of these possibilities may justify a valuation higher than Mr. Blodget’s.
As Mr. Blodget notes, Facebook’s true value is not necessarily what people will pay in the market for its stock. The value of Facebook is its intrinsic worth. This is different than Facebook’s stock market value, which is set by the price investors are willing to pay to own Facebook stock. The two may not always be equal and they frequently diverge. Case in point: Remember during the dot-com bubble a decade ago when Pets.com stock traded at a price giving the company a multibillion-dollar valuation? Months later, Pets.com was bankrupt. Pets.com’s true value turned out to be far less than its stock price indicated.
Facebook’s stock price will benefit from the same hype that drove the dot-com bubble, though in fairness to the company it is a much better business than the high-flyers from that time. Last year, Facebook earned more than a billion dollars.
Even beyond the hype that will drive Facebook’s shares up, the deck is stacked toward Facebook trading at a $100 billion value. The reason is that any number below that figure will have some people deeming the I.P.O. a failure.
And Facebook’s I.P.O. underwriters have a strong incentive to ensure that this does not happen. They are no doubt hungry for the reputational benefit of successfully orchestrating the most newsworthy I.P.O. since Google.
The investment banks are very good at this game. As we just witnessed in the Groupon I.P.O., in which only about 5 percent of the company’s stock was sold, one way investment bankers can increase the offering and trading price of an I.P.O. is to sell a small number of shares. Potential investors will then bid up the price pursuing this small float.
Morgan Stanley already appears to be managing Facebook’s offering with this trick in mind. Facebook is preliminarily planning to offer only $5 billion worth of shares, less than the $10 billion offering that was originally considered. Mark Zuckerberg, Facebook’s chief executive and co-founder, is expected to sell about $2 billion worth of Facebook shares to pay his tax bill from exercising his outstanding options in connection with the offering.
This means that Facebook’s offering is near the bare minimum in number and dollars. It appears that less than 10 percent of Facebook’s outstanding shares will be sold in the offering, leaving the bulk of Facebook’s shares in private hands.
This relatively small offering is intended to build demand through simple economics. By limiting supply, built-in demand for Facebook’s shares will raise the price investors pay. Many investors will purchase predicting a huge pop in Facebook’s stock.
The aggregate number of shares that Facebook offers in the I.P.O. will thus be a barometer for how well the offering is going. The underwriters are likely to increase or decrease the number to match demand in a way that creates a huge pop and a share price equaling a $100 billion valuation.
There will be yet another driver pushing Facebook’s stock price to the stratosphere.
During the dot-com bubble, investment banks would spin off I.P.O. shares to top clients and have arrangements to sell shares in the offering to further ensure that there was high demand. These practices were not only controversial but in some cases illegal. They are now forbidden by law or internal investment banking policies.
These prohibitions do not stop the underwriter’s clients from informally purchasing Facebook shares to ensure that the banks will offer them the next hot I.P.O. In other words, Morgan Stanley and the remainder of the underwriting investment banks in this offering will already have built-in demand. Their premium clients will soak up most of the shares, leaving even fewer shares for the public and pushing them to buy in the I.P.O. after-market, further pushing up Facebook’s price. This is likely to be a big driver of Facebook’s post-I.P.O. stock price as there is tremendous interest among retail investors in owning a piece of Facebook. Indeed, many hedge funds and institutional investors interested in Facebook have already bought shares on the private markets.
The end result is that the Facebook offering is likely to value the company at $100 billion, not because Facebook is worth that figure, but because of the mechanics of I.P.O.’s. But Facebook may not stay at a $100 billion valuation forever if it is not truly worth that amount. In the long run, stock prices tend to revert back to fundamental value as the market realizes its mistakes. We have learned that lesson repeatedly over the last decade.
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.
dealbook.nytimes.com |
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| From: Glenn Petersen | 2/10/2012 8:53:06 PM | | | | | | Whale Hunting: Facebook Hooks 1st-Time Buyers With $5 Of Game Credits For $1
Josh Constine
TechCrunch
February 10, 2012
Only about 5% Facebook gamers pay to play freemium games. If Facebook could up this percentage, it and its third-party app developers could make a lot more money. That’s the idea behind a new promotion Facebook announced today where those who’ve never bought Facebook Credits virtual currency before will be offered $4 in free Credits when they buy $1. This gets users to set up their credit card and experience the rush of paying for an enhanced gaming experience.
Years ago when Facebook first launched its Credits virtual currency, it offered free Credits to some users. While this might have got them hooked on spending virtual currency, it didn’t addict them to paying for it.
Facebook needs credit card numbers badly. Apple has amassed an enormous collection after 10 years of iTunes Mp3 sales, which are now helping it easily sell apps and in-app purchases. If Facebook wants to grow its revenue to satisfy outside investors and be a competitive mobile gaming platform, it needs to get users ready to pay.
But like the street corner pusher says, “this ain’t no charity”. Facebook is only surfacing the promotion in sidebar ads, and TrialPay in-game promotions and offer walls to those who haven’t already bought Credits. User than have to set up a credit card or connect a PayPal account and pay $1 to get the extra $4, or 40 Credits. And next time, they’ll have to pay full price. Facebook wisely does not provide any way to reach the promotion directly in order to deter users from trying to cheat their way to free currency.
If you want to claim your own free Credits, your best bet is to play games by clients of Facebook’s official offers partner TrialPay, such as those by Playfish, Playdom, Kabam, Crowdstar, and iWin. Then visit the offer wall or click through Deal Spot signs within games.
With any luck, Facebook will be able to up the percentage of users who monetize, and thereby discover new whales — gamers who spend orders of magnitude more than the average payer and drive the bottom lines of both indie developers and giants like Zynga.
techcrunch.com |
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| To: Glenn Petersen who wrote (82) | 2/11/2012 4:27:33 PM | | From: jrhana | | | | Glenn
after some antipathy towards Facebook, perhaps I should be a few shares when It first starts trading. Not my usual cup of tea, but you never know. Maybe in five years it will be much higher. Or maybe 10 years. |
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| To: jrhana who wrote (84) | 2/11/2012 5:19:39 PM | | From: Glenn Petersen | | | | John,
For the most part I have been able to separate my likes and dislikes from my investment decisions. Whether you like Facebook or not, it is probably destined to be the most important tech IPO since Google.
Glenn |
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| To: Glenn Petersen who wrote (85) | 2/11/2012 7:24:49 PM | | From: jrhana | | | | Well what's past is past. Facebook was hassling me about some nonsense but that seems to be over. Yes I will try and grab some of that IPO
Thanks for the advice |
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| To: Glenn Petersen who wrote (85) | 2/11/2012 8:18:10 PM | | From: Sr K | | | | >> probably destined to be the most important tech IPO since Google <<
Just looking at 2005, BOT and BIDU will be tough for FB to beat in importance or in value for public investors. BOT popped to more than $130 within 3 days of its October 2005 IPO and was eventually bought by CME. I consider that a technology company.
And BIDU IPO'ed at $29 per ADS ($2.90 adjusted). Without Baidu Google may have dominated search in China.
There are probably some contenders for 2006-2011. VMWare is one. And First Solar for signaling a blowoff that didn't end until it ran to > $300.
Facebook's IPO is a liquidity event forced upon the company by it exceeding 500 shareholders. |
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| To: Sr K who wrote (88) | 2/11/2012 9:00:09 PM | | From: Glenn Petersen | | | | I am not sure that I would classify BOT as a tech company. The offering was obviously mis-priced and the final acquisition price of $8 billion is probably less than 10% of FB's opening valuation.
BIDU is currently valued at $48 billion and is a one trick pony. . . China.
VMW is still tethered to EMC.
GOOG's liquidity event was also driven by the 500 shareholder barrier.
The jury is still out on FSLR's long term viability
Given the magnitude of the prior trading on the secondary markets, I don't expect much of a first day pop.
Note that I was careful to use the word "probably." |
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| From: Glenn Petersen | 2/13/2012 6:46:42 PM | | | | | | I.S.S. Adds to Criticism of Facebook’s Governance
By MICHAEL J. DE LA MERCED
DealBook
New York Times
February 13, 2012, 4:29 pm
Not everyone likes Facebook’s proposed corporate governance plan. Add Institutional Shareholder Services to that list.
The influential proxy adviser took aim at Facebook’s dual-class stock structure in a research note published on Monday, deriding it as an unfair system to regular shareholders — one that could be extremely painful to unwind down the road.
By creating multiple classes of stock — in Facebook’s case, A and B shares, with the latter carrying 10 times more voting power — the social-networking titan is following the path set by LinkedIn, Groupon and Zynga. As the Deal Professor and others have noted, however, a number of unusual arrangements give the company’s chief executive and co-founder, Mark Zuckerberg, control of about 57.1 percent of the company’s voting power.
That is a topic that has drawn censure from a number of corporate-governance watchers, including the California State Teachers’ Retirement System, a large pension fund .
It’s little surprise that I.S.S., long a critic of dual-class shares, is against Facebook’s proposed system. Let’s count the ways the shareholder adviser denigrates the framework in Monday’s note:
- “This is a governance profile with a defense against everything against hubris.”
- I.S.S. later refers to “governance structures which diminish shareholder rights and board accountability.”
- I.S.S. also calls it “an autocratic model of governance.”
In what seems like the equivalent to I.S.S. of adding insult to injury, Facebook also plans to adopt a staggered board, one where only some board members are up for election every years, and a provision that prevents shareholders from complaining about their lesser voting rights.
But the proxy adviser also notes that, should Facebook want to dismantle its dual-class system, such a move could be difficult. I.S.S. details the issues that Benihana, Telephone & Data Systems and Magna International suffered in even partially streamlining their shares. Among the consequences was internecine warfare between different shareholder classes, which led to at least short-term pain for investors.
Ultimately, however, Facebook shareholders face what I.S.S. calls a “Hobson’s choice” at the moment. They can become second-class shareholders with relatively few protections or miss out on one of the most eagerly awaited I.P.O.’s of the decade.
dealbook.nytimes.com |
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