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article imageOp-Ed: Will Facebook stock be a wise, or a risky, investment?

By Leigh Goessl     Feb 28, 2012 in Business
All last year the big question regarding Facebook was, will they or won't they go public? Then, the question morphed into, not if Facebook would enter the stock market, but when.
However, that musing has been settled now that Facebook has initiated an initial public offering with U.S. Securities and Exchange Commission (SEC).
At the beginning of Feb., after high speculation, news broke Facebook filed its S-1 paperwork with the SEC. Speculation is Facebook stock, which will be traded under the ticker FB, will be available approximately in May.
Many investors currently have their eyes on any Internet company making the leap to IPO. Social media is a growing niche, and as more social-centric companies leap into the market, these stocks are potential hot investments. Facebook has often been touted as the 'mother' of all IPOs, and perhaps with good reason. Approaching a whopping billion-member user base, the social network is the most visible on the web. It is speculated the IPO will give Facebook a valuation at about $100 billion.
Facebook is currently in its 'quiet period,' which means there isn't a whole lot of new news coming from the company while the SEC evaluates the IPO filing. At this time much discussion appears to surround whether or not the company make a good investment, especially in the long-term.
Over time there has been much speculation as to whether or not a Facebook investment would be a lucrative one, as with Internet companies, there is always some level of unpredictability. There is also the consideration technology progresses rapidly, and as new ideas crop up, trends come and go. While it is said about 1,000 millionaires will be made with Facebook's IPO, does that mean investors will have a sweet deal too?
At the moment Facebook appears as if it has gone beyond an Internet trend, and has evolved into a part of daily routine for hundreds of millions of people. However, just as fast as the network rose, there is also the possibility it may fall just as fast. Ultimately, perhaps it may boil down to whether or not the network continues to evolve to meet current trends, becomes oversaturated, or people simply bore of it.
That, in itself, may put a damper on the enthusiasm to invest.
Yet, some corporate governance experts are saying there is another reason to consider why Facebook may be a risky investment.
According to Business Week, experts note CEO Mark Zuckerberg has close to 57 percent voting power and, once public, will maintain control over Facebook without allowing much "sway over the company's direction," from directors and shareholders.
Charles Elson, a University of Delaware corporate-governance professor, told Business Week, “The public has no say in the control of the board, which in my view is terribly harmful to any notion of accountability. It's very troubling to investors, and it's a bad bet for them.”
An article in MSNBC, The Bottomline, concurs. Governance experts are cautioning investors to "be wary" of the "stringent executive control structure" outlined in Facebook's IPO registration.
Aswath Damodaran, a professor of finance at New York University's Stern School of Business, said, “Right now you have a situation at Facebook where there’s a benevolent dictatorship, but my concern is they tend to become malevolent dictatorships, and that can hurt you when it comes to the pinch.”
Damodaran has said in his blog he has no intentions to jump on this stock.
According to IPO documents, Zuckerberg would retain his current control over the company and also maintains the right to choose his own successor. Damodaran noted the social network giant has "set up defenses" safeguarding against takeovers and proxy fights in the event shareholders decided new leadership would be beneficial.
Facebook CEO Mark Zuckerberg speaks at a press conference from the company s headquarters
Facebook CEO Mark Zuckerberg speaks at a press conference from the company's headquarters
Screen grab from Facebook livestream
Business Week pointed out the CEO owns 28.4 percent of Facebook, and as structured, has "10 times more voting power than common stock," per the filing. Zuckerberg has also made agreements with individual stockholders, owning an "irrevocable proxy" over those shares, increasing his voting powers.
Reportedly, Facebook has filed as a "controlled company," which means the company does not have to adhere certain restrictions connected to begin a public company, such as a majority of independent Board of Directors. Inside IPO refers to this as the "Facebook corporate governance minefield."
“Zuckerberg controls the vote and, because of that, they don't have to adhere to the strict rules of public companies,” said David Larcker, professor at Stanford University's Rock Center for Corporate Governance, reported Business Week.
Thinking of investing in Facebook once available? It's probably wise to understand the nitty-gritty, as experts note, it may be a risky bet to invest in a company with this type of structure.
“So let’s say for example that in 10 years’ time there’s some disaster at Facebook and it receives a takeover offer from Apple,” continues Damodaran. “Shareholders might want the company to take the offer, but if Zuckerberg says it can’t go through it doesn’t happen. Sometimes it’s best for a company in trouble to clean house and do away with management and the board and be acquired at the best price.”
Facebook is definitely a potentially hot stock to watch, and according to a recent Wall Street Journal piece, some are looking to get into the action now, however will it really be worth it in the long term?
Maybe the financial return will be a lucrative payoff if the company continues to flourish.
But, then again, as Mathew Ingram on GigaOm queries, "Can Facebook grow enough to be worth the investment, or is the company nearing its peak?"
After all, with close to a billion members, some might question, how much further can the company, in its current business model, go?
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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