3 Facebook Myths Debunked
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Andrew Ross Sorkin, New York Times journalist and author of Too Big to Fail, published a new column last Tuesday pointing the Facebook (NASDAQ: FB) IPO blame at the company’s CFO, David Ebersman. As FB shares continue to hit new lows, investors (and journalists) seem on the hunt for retribution by way of blood sacrifice.
It’s widely agreed that Facebook was overvalued at the time of its listing. A strong case could be made that the price still hasn’t fallen to its true value. But amidst the valid arguments over fundamentals, there have been some Facebook related myths that keep in rotation, like a social networking urban legend.
Here are three myths debunked, in ascending order of importance.
3. Facebook will punish an exec for the IPO screw-up
CFO David Ebersman was the highest poppy in the field last week, with angered investors wanting to lop off his head. Was it Ebersman’s fault? A degree of blame can be placed at his feet. Ebersman has experience with taking a company public but his previous employer, Genentech, was biotech rather than tech. Ebersman signed off on an IPO listing price that seemed to match the estimates of underwriters and the general enthusiasm of investors at that time. While NASDAQ troubles contributed to the poor first day performance (for which NASDAQ is being fined), early IPO investors shocked at the price downturn should’ve done more research if hoping for a short, prosperous ride.
When it comes to punishment within the Facebook inner circle, Ebersman could only lose his job over that decision if Mark Zuckerberg wanted him out. Zuckerberg hasn’t shown any such desire. The CEO himself has been subject to headlines calling for his ousting. That’s not going to happen.
2. Mark Zuckerberg will bow to investor pressures
Facebook’s corporate structure is designed to keep Zuckerberg at the helm, which also means he doesn’t really need to care what investors think of him. Facebook has a dual class system where Class B shares have 10 times the voting rights of Class A. Class B shares are owned mostly by Zuckerberg with the remainder spread out among Facebook insiders. Post-IPO, Zuckerberg owned 18% of the company but had 57% of the voting power.
It’s not an unusual arrangement, though it used to be more common with newspaper publishers. Google (NASDAQ: GOOG) popularized the dual class model for tech companies when it listed its IPO in 2004. Like Zuckerberg, Google founders Larry Page and Sergey Brin trusted themselves more than investors. That isn’t unreasonable. Investors can be short-sighted and limited in attention spans. For a tech company founder focusing on long term goals, it can make more sense to keep the investors somewhat at bay.
Zuckerberg isn’t completely ignoring investors, cackling as he swims in his (diminishing) Scrooge McDuck-esque vault of money. Last Tuesday, after the Sorkin piece and a pessimistic note from Morgan Stanley sent share prices further down, he assured investors that he'd hold onto his shares for at least a year. Facebook also withdrew plans to sell additional stock to cover tax debts. The taxes will instead be paid with available cash and borrowed funds. The employee lockup expirations were also adjusted to reduce the amount of shares that could potentially flood the market on forthcoming expiration dates. According to Reuters, the tax move will reduce outstanding shares by 101 million. The gradual lockup expirations could keep investors from bolting in fear of an insider flood hitting.
1. Facebook is unhappy with its current performance
If the execs at Facebook had a choice, it would be far better to be excelling on the market than thudding. But Mark Zuckerberg only considers the business aspects of Facebook important when needed to further his project goals.
Henry Blodget at Business Insider recently posted a copy of Zuckerberg’s pre-IPO letter to shareholders and highlighted the fact that the CEO flat out warned shareholders about his “money comes second” philosophies. An important direct quote from his letter:
“Simply put: we don’t build services to make money; we make money to build better services. And we think this is a good way to build something.”
Zuckerberg wants to build things. Facebook is still rich in cash, to the point that its IPO earnings weren’t earmarked for any specific reason. There are still ways in which the company can grow, through advertising platforms and new mobile endeavors. If the initial listing hadn't been so badly mispriced, chatter about Facebook's fundamentals would likely have more patience built-in. Mark Zuckerberg himself is plenty patient and is capable of riding out this wave of bad feelings until another IPO flop steals his headlines.
Final Thoughts
The sad truth is that Facebook’s corporate structure, and Zuckerberg’s monetary standpoint, have been public record since before the IPO. Investors that did research into the company would’ve realized the added problems to the overpriced listing. Options players are still having a field day with the dwindling prices. Investors who lean more towards the defensive should sit back and watch, waiting to see if Facebook comes up with stronger monetization methods in the future.
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