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article imageOp-Ed: A $100 billion blind date – Facebook IPO vs. market realities

By Paul Wallis     Jan 28, 2012 in Internet
Sydney - The public float of Facebook has been talked about for years. It’s now happening. The initial placement offering (IPO) will make Facebook one of the biggest companies in the world. How the market treats Facebook will be interesting to see.
The story according to the Sydney Morning Herald:
The Wall Street Journal reported that the filing with the Securities and Exchange Commission could come as early as Wednesday, with an initial public offering of stock in three or four months.
Facebook itself won’t comment, but nobody in business believes that it won’t float, and soon. The possible value of the IPO is $100 billion. That sort of money just doesn’t stay on the shelf. Mark Zuckerberg may be controversial for various reasons, but there’s no controversy about his business savvy. The float does make good business sense, and he’d be a natural prime beneficiary. Raising capital in this way simultaneously creates an equity structure and provides money for Facebook’s inevitable expansion and evolution.
Those are the basics, and they define the upside of the Facebook IPO. The market is quite likely to welcome Facebook with open arms. A new, big company with a lot of stock generates business for the financial sector, and it also creates new investment options in a particularly lacklustre market. Facebook is quite unique as a public company. It has no competition, reasonable revenue, and it’s hard to imagine a more flexible platform for business options.
In 2010 Facebook launched a site called  Facebook Stories
In 2010 Facebook launched a site called "Facebook Stories"
Photo courtesy Facebook
Facebook, meet Market- Market, meet Facebook
There’s another side to this listing, though, and it’s not anywhere near as storybook-friendly. The listing of Facebook is like a blind date for both Facebook and the market. Facebook’s various controversies, when not on the market, don’t have a lot of impact. In an ultra-reactive investment environment which could barely be described as rational and in which analysts pounce on anything as a basis for a buy/sell rating, they could be lethal to investors.
The stock market has a bad habit of being both too enthusiastic and too reactive with internet-based stocks. Google is the classic case of the exceptional stock which took over the market, and, incidentally, backed up its stock price with performance most of the time. Yahoo is the case of The Little Engine That Should Have, and the market read it correctly.
Generally, these stocks can be pretty volatile. Few companies and CEOs, however, attract anywhere near the sort of flak and instant reporting of Facebook and Zuckerberg. Everything’s a headline. That is definitely not a plus for any public company. There is such a thing as bad publicity in the market. Facebook has been criticized, rightly and wrongly, for its reactions to various site issues. Those issues and their criticism will translate directly into dollars on the market when Facebook lists. Good news, for the market, is very much in the eye of the reporters.
Can financial reporters penetrate the market realities of a company like Facebook? Will they understand the issues, or just do a bottom line reporting approach, “This means cashflow, capital management,” etc.? My guess would be that it’s going to take some time for the Facebook business model to make sense.
The same applies to Facebook. Does a previously well-insulated private company know how to ride the waves of the market? Will Facebook be able to handle the demanding (to put it politely) hedge funds and private equity stockholders? Facebook will need to take care to manage not only what’s reported, but how it’s reported.
Facebook will need handlers, just to deal with the basics. It will also need to look out for the equity positioning. Sooner or later, someone will want a bigger chunk of a $100 billion company. That could throw multiple spanners into management, and that may not sit too well with Zuckerberg’s previously unchallenged style.
Investors and investment
For investors, Facebook is at the moment a name with some upside. The fact is that for all the talk of “social media marketing”, the marketing sector hasn’t been delivering much in the form of hard product. For Facebook to click (sorry) as a credible company, the hard product has to deliver dollar values for Facebook.
The not-very inspired marketing done so far has really delivered cheerleading, and the equivalent of a web page. That’s not going to be good enough for the market, and definitely not for the hardheads directing big capital investment.
The risk for investors is that Facebook could come on the market as the most-hyped thing since Wonder Bread, then just fade as the market guys take the money and run. Another scenario is Slow Death- The stock lists, then deteriorates or flatlines its price for years.
There are a lot of imponderables here. Can Facebook deliver an Apple-like category killer product beyond “just being Facebook”? The site has to evolve, and evolve a lot. Can “social” become more than a buzzword for marketing? I’ll believe it when I see it. Facebook is massively under-utilized as a medium for marketing, and the sheer lack of imagination is truly disgraceful.
The big risk for Facebook
Listing as a public company comes with big risks. Facebook is entering a market where giant US companies have been tanking with a vicious regularity. Trusting the market is like trusting a gun. It really depends which way it’s pointing and whether you’re on the receiving end. Debt is the usual killer, but a gridlocked equity situation can also turn management into an obstacle course for the company.
Good luck, guys.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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