Bloomberg's bomb: How SEC shredded Facebook's pre-IPO claims According to a recently publicised set of emails, US financial watchdog the Securities and Exchange Commission found that important claims made by Facebook were unsupportable and forced the company to disclose key weaknesses in its business plan before its 18 May IPO. The highlights are outlined in this lengthy report from …
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Shares are valued on expectations of future profits distributed as dividends, right? So it shouldn't really matter what the share price is.
Oh wait, your "investment" was actually speculation on the share price itself, in a company that may never pay a dividend?
This seems familiar. Dot com something or other. But that was ages ago. History never repeats itself.
You don't need a Dot.Com example - for decades Microsoft never paid a dividend, instead everyone brought their shares expecting to make a profit due to share-price inflation. MS only started paying dividends when it's share price peaked and major shareholders started thinking about bailing out. Basically the dividends were paid as a bribe to keep the share price propped up.
I was just wondering how the MS haters would find a way to get a dig in. Well done.
FYI Google have bever paid a dividend and say "nor do we expect to pay any cash dividends in the foreseeable future". Apple never paid a dividend while Steve Jobs was CEO.
Once upon a time, before tax laws made a hash of it, yes. These days, a decent dividend is more a sign of a moribund, government regulated monopoly/oligopoly than anything else. Stocks instead are bought and sold on the basis of how much you think you'll net when you sell it for capital gains. The overall negative effect this has had on the market, and its usefulness as an economic indicator is tremendous.
Of course, the safest estimate of that gain is a division of expected profit from selling widgets to the public divided by the number of shares, with a simultaneous examination of the sales growth trend for the company. Facebook doesn't make widgets so that first bit is right out the window, and now what we're hearing is that FB knew they were on a down slope for their "sales growth" proxy to boot.
So the end result of your analysis stands, albeit via a more circuitous route.
It's been proved that people judge the quality of wine, when buying, by the price, on the grounds that there's so many to choose from, you pick a type you might like, and assume quality increases with price.
This is in fact true. So long as you know the price, most people will find the wine tastes nicer than a cheaper one.
In a blind taste test however... Oh dear.
On the other hand, I'm generally sympathetic to people who get ripped off, even if they've got loadsa-money. And I'm more worried that the people buying Facebook stock might have been pension and investment funds, so that poor retail investors are actually the ones taking a huge bath on this Facebook Fuck-Up.
On the gripping hand, the under-writers did their job. Which they often don't do. The very reason for the unpopularity of the sale is that the price didn't shoot up. i.e. the privileged early investors who can get in on IPOs expect to make a nice fat profit by selling on day one, which is pure economic inefficiency. The purpose of an IPO is to reward the initial investors and get cash to a business so it can grow. There's a nasty cartel in the markets aimed at setting IPOs a bit too low, so that all the city-boy's can make a nice easy profit. The underwriter's job, if they're not being self-interested, is to maximise the cash to the vendors, but because they work with the same buyers all the time, the temptation is to be popular with them, not their actual clients. However, I'm sure this was only accidental. And we'll never know how much effect Nasdaq's cock-ups had.
". And I'm more worried that the people buying Facebook stock might have been pension and investment funds, so that poor retail investors are actually the ones taking a huge bath on this Facebook Fuck-Up."
Exactly. We've all paid for this in one way or another, as the suckers will have included pension funds and insurance companies.
Grrrrr
"In a blind taste test however... Oh dear."
Indeed. A couple years ago, the overall winner of the blind tasting of California Chardonnay at the CalStateFair was the cheapest. The wine? Charles Shaw, AKA "Two Buck Chuck", at US$2 per 750ml bottle. Available at a Whole Foods near you, 10% off by the case. It's my goto cooking wine, and I'll often decant a bottle or two when being visited by wine snobs, telling them "this is an experiment, let me know what you think". They assume it's one of my vintages that I'm playing with, and invariably they ask if they can purchase a case or three. The look on their faces when I tell 'em what it actually is is priceless :-)
Problem is, it isn't just the wealthy sheep. This is hitting mom and pop investors whose primary vehicle is their IRA/401k/retirement fund.
And as far as I can see, most of the wealthy sheep who were in on the scam aren't getting sheared because they took precautions to protect themselves.
First: nobody should invest in common stocks unless they can afford to lose their entire investment and understand that they might do so.
Second: nobody should invest in a company without understanding either how it is going to make a profit into the distant future or that they are gambling just as much as if they were gaming in a casino.
So I didn't invest in Facebook. If mom & pop did, I hope the cost of the lesson didn't empty their retirement fund, but I don't have a great deal of sympathy.
In the web 2.0 model a user which is logged in, pushes likes, etc on third party sites is _WAY_ more valuable than a user that contributes contents because it provides actual marketing information which can directly translate into market analysis and advertisement targeting AKA revenue.
So f***book is in fact correct to count these.
Now as far as the other stuff - that does not surprise anyone on this site. Right?
This was always a speculative stock and people should have no complaints about getting burnt per se, but if an IPOing firm or its army of corporate hangers-on have fudged the disclosure requirements then they're selling you something materially different than advertised.
If you buy a porsche and a morris minor gets delivered then saying 'caveat emptor' doesn't magically absolve the seller of responsibility.
That being said, the case for showing that following proper disclosure requirements would have stemmed the herd of lemmings from hurling themselves of a financial cliff isn't clear, so remedies may be small.
But in this case, you could see that it was a Morris Minor, everybody in the industry said it was a Morris Minor. The only people that claimed it was a Porsche was the owner and a lot of 'financial analysts'. Now if you decide to go with the biased opinion rather than the informed one, then you shouldn't really be surprised when a Morris Minor ends up on your front doorstep.
I don't disagree with the sentiment, but the point is that seperately from whether someone is stupid or not to buy something, it's either been positioned legally or it hasn't. PLCs aren't entities that investors can see and feel, and so they rely on the probity of the details filed in deciding how to invest.
Buying a high-risk firm that would need absurd revenue growth in order to meet your valuation is most peoples' idea of stupid (and that's where I agree with you).
Buying a high-risk firm that would neeed absurd revenue growth when the firm and its hangers-on are withholding important information that they're legally obliged to provide means you have a case.
Obviously the article here confirms that they did eventually file those details (under pressure from the SEC), and the lemmings still bought, which strengthens your 'people who bought it were stupid' point, but it's important to note that when a stock sale fails to meet basic legal requirements it's not just a case of caveat emptor (otherwise moral hazard would crowd any sensible investors out of the market, and it would collapse).
I think it's great that so many of the people who say "caveat emptor" never heard it before ebay came along and they are the same people that post smack talk about ebay. It's funny. The Internet is fun and full of so many dumbasses. No reason for cable TV, I can just read comments.
Facebook has a much bigger problem than some tiny SEC scandal during the botched run-up of the IPO. Their biggest problem now, one they will not be able to overcome, is that they have become irrelevant. Nobody cares anymore.
http://mankabros.com/blogs/onmedea/2012/10/04/facebook-is-irrelevant/
Didn't some pundit note that in order to match pre-IPO earnings estimates, that Facebook would need a whole extra PLANET of new subscribers?
That's even taking the now-debunked items at face value.
I find high finance absolutely mystifying. This is why I will almost certainly die poor, I guess.
The points 1 &2 are correct. Point 3 can be debated based on the "must read" item:
"The losses were acute for retail investors. They were allocated an unusually high proportion of shares after institutional investors balked. And they didn’t get the same flurry of warning calls from Facebook officials who, days before the IPO, privately advised securities firm analysts to lower earnings and profit estimates -- largely on the dearth of revenue from mobile users. "
That looks a lot like insider trading from where I am sitting - the retail investors did not have access to the information that the corporates did, and those corporates sold on the basis of the "better" information. The dénouement may be rather gripping once the SEC finish the story.
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