Facebook last week announced its Initial Public Offering — exactly the event I said wouldn’t happen in one of my controversial predictions for 2012. But I’m sticking with my call on this one since we’re 2-3 months from the actual event and a lot can happen to screw things up between now and then. I’m pretty sure Facebook shares will be trading sometime this year, I just don’t think the company will have a traditional IPO.
Companies go public for three reasons: 1) to raise capital for various corporate purposes like acquisitions and paying down debt; 2) to secure the wealth of founders, giving their kids something to fight over, and; 3) because they have over 500 investors, secondary trading of shares is picking up and if they don’t go public under a process they control the SEC will force them to go public in a less-profitable event. Facebook in its prospectus says reason one — the most cited reason by far for companies going public — does not apply to them. They don’t really need the money and plan to park it in T-bills, which if you think about it can only drag Facebook earnings down given current low interest rates.
Give us your money and we’ll do nothing with it. Not only that, we’ll also use your money to hurt the value of your shares.
To be fair, sometimes companies go public just because they can. Remember the dot-com bubble? In that period of irrational exuberance companies went public and their shares soared for awhile without regard to profitability or even having a real business model. So sometimes you take the money because it is obviously stupid money and if you don’t take it now you may never get another chance (yes, I’m talking about you, Webvan).
But that’s certainly not the case with Facebook, which is profitable and growing, has no debt, and has $3.5 billion already earning next to nothing in the bank.
Reason two for having an IPO — to secure the wealth of founders and early investors — is the reason Facebook gave for going public and that makes sense. After eight years of hard work everyone involved would like a liquidity event so they can buy a new house and car. There’s nothing wrong with this motivation except, given the lack of actual need for capital, it shows a misalignment of interests between Facebook management and new Facebook investors. We are actually investing in their Ferraris.
Now maybe Facebook is the IPO of the century and none of this matters, but as a narrative for big institutional investors it’s a little shaky, especially when you see that after the IPO Facebook CEO Mark Zuckerberg, who is younger than the IBM PC, will still control 57 percent of Facebook’s voting shares, in effect placing total voting and managerial control of a major public company in a single executive. This is unprecedented for a company at this scale; even Bill Gates only owns 20-odd percent of Microsoft and had to answer to investors when he was CEO.
So this isn’t just the Facebook IPO, it is the Zuckerberg IPO.
Something similar to this happened back in 1988 when Dell Computer went public. Michael Dell was the Mark Zuckerberg of his era. At 24, Dell was even younger than Zuckerberg is today. Dell was smart and he was full of himself — but not so full that he thought he could carry the company offering on his shoulders alone. With the encouragement of his investors and board, Dell hired some seasoned managers to help him take the company public, then later fired them all and went back to running the company as he saw fit.
Mark Zuckerberg wants to do the same thing that Michael Dell did, just minus the pro forma hiring and firing of suits.
It’s going to be a slog for Zuckerberg. For the next 2-3 months he’ll have to be everywhere, kissing ass while not appearing to be kissing ass, answering tons of boneheaded questions from people he doesn’t respect — people who will be primarily questioning his vision and fitness to lead.
Zuckerberg is going to hate this process and might explode as a result. He’s going to be under a journalistic microscope, too, and some bad information about him may come forth (I don’t have any, by the way, but powerful people often have powerful enemies). Throw in some bad business news for Facebook or some good news for Google and a $100 billion IPO starts to look pretty iffy. There are lots of ways this process could fall apart.
What’s a geek to do?
Well just as there are three reasons for companies to go public there are also three ways to do it. The normal way is to follow the traditional path Facebook and Zuckerberg have embarked on now — hire investment bankers, do a road show, pay $500 million in fees, go public. That’s how Dell did it in 1988, though that company raised only $30 million, not $5 billion, so the fees were significantly lower.
The second way to go public is to do nothing at all yet have more than 500 investors and a brisk secondary trading market in private company shares. In that case the SEC will do the IPO for you for free (well, they’ll fine you too, but not much) which sounds good in a way but must be bad because nobody ever does it. Name a company that went public in this manner? I can’t.
The third way to go public is by buying or merging with a company that is already public. This is viewed on Wall Street as the chickenshit method because it generates nowhere near as much in fees to investment bankers who, after all, are the cowboys driving this herd. To be fair, most of the time when companies back into going public it is because of weakness. Certainly the public company they are buying is weak, often valueless. The decision to use this method is often based on being unable to find an underwriter to go public by the usual route and not having the capital to wait for better times. Again, it’s hard to find a really big company that has done it this way, though little companies do this all the time.
But that’s exactly why I feel Facebook will abandon its present IPO course and instead buy a public company.
No road show for one thing. Zuckerberg’s agony ends. The idea that acquiring a weak public company would drag down Facebook shares is ridiculous because Facebook is so big and available public shells are so small that the dilution effect would be vastly less than that $500 million in banker fees.
Here’s an idea: Facebook might actually find a public company it wants to buy. Yeah, that’s the ticket.
And while buying a public company would limit the amount of money Facebook would be able to raise initially, the point isn’t to even raise money, remember? The negative effect of all those T-bills would be avoided.
That’s why I think Facebook will change course and back into being a public company. It’s cheaper, easier, and accomplishes the same result. Five years from now nobody will even remember how they did it any more than they can explain Google’s Dutch Auction IPO in 2004.