tip off

Facebook falls flat on its face, but blaming CFO not on

The recriminations over the Facebook float continue, with The New York Times and the owner of a basketball team weighing in on the villains and victims of the float. Facebook shares closed at $US19.56 yesterday — about half the IPO price, giving the company a market value of $US42 billion (the shares bounced from an all-time low of $US17.55 after founder Mark Zuckerberg confirmed he wouldn’t sell Facebook stock for at least a year).

Given the near halving of the share price in a few months, not unexpectedly, the business press are searching for villains upon whom the losses can be blamed.

The malaise prompted Andrew Ross Sorkin  — the young New York Times columnist who achieved a degree of fame with his GFC ode Too Big To Fail  — to join in the hunt, with Sorkin choosing to lay the blame on Facebook’s CFO David Ebersman for the share price collapse. In a bizarre attack (especially for Sorkin, who spent most of Too Big to Fail praising the likes of Henry Paulson), the columnist claimed:

If there is one single individual more responsible than any other for the staggering mispricing of Facebook’s IPO, it is Mr Ebersman. He signed off on the ever-increasing offer price, which ended up at $38 after the company had originally planned a price range of $28 to $35.

He — almost alone — pushed to flood the market with 25% more shares than originally planned in the final days before the offering. And since then, as the point person for investors, he has done little to articulate how or why the company’s strategy will lift the stock price any time soon.”

For someone of Sorkin’s apparent connections and nous, the attack was extraordinary. Ebersman as CFO would have had little, if any real influence on the final IPO price — especially given Zuckerberg’s stranglehold over Facebook (and the influence of Sheryl Sandberg) — not to mention powerful board members such as Peter Thiel, Don Graham and Marc Andreessen. (Thiel, who was Facebook’s first angel investor was quick to offload his stake after listing, so he presumably would have supported the highest possible IPO price. Other early holders such as Dustin Moskovitz and Russian based Mail.Ru have been offloading a large number of shares as well).

But even if the IPO price was within the unlikely sole purvey of Ebersman, as this column has noted, Facebook vendors (that is, the people who hired Ebersman) benefited from a float price that was above the intrinsic value of the business. Anyone who invested (or more aptly, speculated) on Facebook shares did so under the knowledge that they were making a very risky bet on a company that would effectively be trading on a price earnings multiple of about 100 and whose sales growth was dramatically shrinking from 154% in 2010 to only 45% in the first quarter this year.

Ironically it took Mark Cuban, the owner of the Dallas Mavericks basketball team (and one-time guest star on HBO’s Entourage) to give Sorkin a lesson on the sharemarket. Cuban noted: “I bought and sold FB shares as a TRADE, not an investment. I lost money. When the stock didn’t bounce as I thought/hoped it would, I realised I was wrong and got out. It wasn’t the fault of the FB CFO that I lost money. It was my fault. I know that no one sells me shares of stock because they expect the price of the stock to go up. So someone saw me coming and they sold me the stock. That is the way the stockmarket works. When you sit at the trading terminal you look for the sucker. When you don’t see one, it’s you. In this case it was me.”

Facebook of course, may turn out to be a wonderful investment, even for the punters who paid $US40 a share (although that seems pretty unlikely). Its success depends on whether it can create income streams from search or transactions (so far, it has struggled in both categories). And there are substantial questions as to whether Facebook should simply have remained as a private company — it had no real need for capital, and it has yet to full develop a profitable business model that matches its reach. But again — that has nothing to do with the CFO.

Some analysts forecast Facebook shares to fall to single digits (some predict it may fall as low as $US5 per share, which is about equal to its asset backing), but that’s not the fault of Facebook’s CFO, or even Zuckerberg. Sharemarket players need to be able to work out a business’s intrinsic worth for themselves, and stand by their decisions — unless the executives and directors are criminals (which isn’t the case for Facebook) they shouldn’t be blaming others for their own poor investments.

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