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The market doesn't care about your overpriced valuation (Failbook)

williamkasel.posterous.com

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Re: The market doesn't care about your overpriced valuation (Failbook)

#21

Post by robbiep »

wkasel wrote: post #8
robbiep wrote: post #6

I feel like this article misses a number of points. Firstly, the modern IPO is chiefly about giving early investors and staff an exit ticket. It is therefore in their interests to price it as high as possible. The fact that there was significant hype around the business meant that they were able to achieve this valuation. The fact that this is distinct from the original aim of the sharemarket - that is, capitalising…

With all due respect, I completely disagree. If you understand the fundamentals of an IPO, as I explained below you would know that there is a 180 day lock-up period for employees, this means that employees haven't been able to sell their stock yet. When they do sell their stock it will be at $10/$15/share. The only folks who made money on the IPO were Merrill Lynch who SHORTED IT! You're typically supposed to IPO at…

I agree with your point about every techcrunch etc saying what 'facebook NEEDS to do' - as if you can judge the failure/success of a company 3 months post IPO on the value of a stock.

I continue to disagree with you about this fucking Zuckerberg/Employees etc. They have turned paper money into real money. They have lost - psychologically - some unreal money in their freeze period (BTW I was not aware of this, I am much more familiar with Australian securities law). The ~70 Billion of shares from outside investors (Guestimate, I don't know how much stock was retained by employees) - has capitalised the company however, and these are the people who are getting b*tchsplapped by the invisible hand.

With regard to IPO as you are preparing to grow - yes. But that just highlights the nature of IPOs in a bubble. As another poster said, they have managed to significantly capitalise the company despite the fact that rational investors have subsequently brought the share price back to something that (they consider) is more properly the fair value. the idea that a shareprice should skyrocket post IPO is a fallacy that goes against the Efficient Market Hypothesis - i.e. that in the long run you can't achieve returns that are greater than the average market return. This same fallacy is what most 'uninformed' investors are investing in the market under - and it is the existence of these investors that allows informed investors to make a killing on their behalf - in this case, Merrill (and assumably lots of others) by shorting the stock.

Re: The market doesn't care about your overpriced valuation (Failbook)

#22

Post by wkasel »

aniro wrote: post #18
robbiep wrote: post #6

I feel like this article misses a number of points. Firstly, the modern IPO is chiefly about giving early investors and staff an exit ticket. It is therefore in their interests to price it as high as possible. The fact that there was significant hype around the business meant that they were able to achieve this valuation. The fact that this is distinct from the original aim of the sharemarket - that is, capitalising…

In this case "extract maximum returns for the early investors" means that a whole lot of people got ripped off. The notion that "the modern IPO is chiefly about giving early investors and staff an exit ticket" is a near perfect example of how "Silicon Valley, I hate to say it, has its head so far up its ass that it's eating its own bullshit." The investors purchasing Facebook at IPO and after are not looking to rewar…

Well said. You're exactly right. I didn't cover it, but the larger concern I have here is that this misguided approach could lead to distrust from wall street of any tech IPO's that aren't enterprise, or low/mid cap.

Re: The market doesn't care about your overpriced valuation (Failbook)

#23

Post by goodcanadian »

wkasel wrote: post #19
robryan wrote: post #15

Earlier quoted context omitted.

That is the same though as investors buying in at $38. Employees could always choose to negotiate the grants or leave if they think they are bad value.

The root of my argument though is that as Silicon Valley know-it-alls we assumed the world would gawk in awe of our amazing creation and throw money at us, which it did not. It's a shame you can't buy put's on that, because THAT would have been worth it. :)

Indeed. Despite our disagreement higher up this thread on who gets screwed and why, I did quite enjoy the article. I looked at it more as a cautionary tale about getting drawn into the hype surrounding IPOs in general and tech IPOs in particular. The market is not as efficient as economists sometimes like to pretend, but it does have a central tendency and if the fundamentals don't support the valuation, the market will bring the price back down.

I say, if you can IPO at an overpriced level, do it, but don't believe your own hype and buy into it yourself. You will be disappointed.

Re: The market doesn't care about your overpriced valuation (Failbook)

#24

Post by robbiep »

wkasel wrote: post #22
aniro wrote: post #18

Earlier quoted context omitted.

In this case "extract maximum returns for the early investors" means that a whole lot of people got ripped off. The notion that "the modern IPO is chiefly about giving early investors and staff an exit ticket" is a near perfect example of how "Silicon Valley, I hate to say it, has its head so far up its ass that it's eating its own bullshit." The investors purchasing Facebook at IPO and after are not looking to rewar…

Well said. You're exactly right. I didn't cover it, but the larger concern I have here is that this misguided approach could lead to distrust from wall street of any tech IPO's that aren't enterprise, or low/mid cap.

This is not a new phenomenon though. Look at tech bubble #1. hell, go back in time and look at Tulip Mania or the railroad bubble in the late 19th century. Wall Street will continue to do what is in it's interest. With average returns from Underwriting an IPO in the range of 7-9% they have to. Wall Street doesn't care that mum and pop investors get screwed - they just need to know that there are more out there that will continue to buy IPOs if they are presented in the right way.

BTW, IPOs have been in long term decline (in terms of absolute numbers) for ~20 years now - see the economist

http://www.economist.com/node/21555552?zid=300&ah=e7b937...

Re: The market doesn't care about your overpriced valuation (Failbook)

#25

Post by jussij »

epistasis wrote: post #20
wkasel wrote: post #8

Earlier quoted context omitted.

With all due respect, I completely disagree. If you understand the fundamentals of an IPO, as I explained below you would know that there is a 180 day lock-up period for employees, this means that employees haven't been able to sell their stock yet. When they do sell their stock it will be at $10/$15/share. The only folks who made money on the IPO were Merrill Lynch who SHORTED IT! You're typically supposed to IPO at…

No, that's wrong, the only way an initial overvaluation hurts pre-IPO investors is if the stock gets delisted, or the market is so offended that it starts caring and undervalues the company. Otherwise, employees are just fine; Since the market doesn't care, it gives them fair value when they have a chance to sell. They lose out on cashing out during the over-valuation period, but that was just free money for those th…

> but that was just free money

Except the employees would have been sacrificing a higher salary for these shares so they where hardly free.

> The only people hurt by the initial over valuation were the people that bought high

The people that got burnt where those that read the IPO document and assumed it was not a work of fiction. The people that made money where insider trading on information not yet public.

The others that will get hurt are the next set of companies that try to float. The market will be reluctant to make the same mistake again.

Bad IPOs damage the credibility of the market and dmaage the ability of companies to float and that Facebook IPO was just a joke.

Re: The market doesn't care about your overpriced valuation (Failbook)

#26

Post by wkasel »

jussij wrote: post #25
epistasis wrote: post #20

Earlier quoted context omitted.

No, that's wrong, the only way an initial overvaluation hurts pre-IPO investors is if the stock gets delisted, or the market is so offended that it starts caring and undervalues the company. Otherwise, employees are just fine; Since the market doesn't care, it gives them fair value when they have a chance to sell. They lose out on cashing out during the over-valuation period, but that was just free money for those th…

> but that was just free money Except the employees would have been sacrificing a higher salary for these shares so they where hardly free. > The only people hurt by the initial over valuation were the people that bought high The people that got burnt where those that read the IPO document and assumed it was not a work of fiction. The people that made money where insider trading on information not yet public. The oth…

Spot on.

Re: The market doesn't care about your overpriced valuation (Failbook)

#27

Post by epistasis »

wkasel wrote: post #19
robryan wrote: post #15

Earlier quoted context omitted.

That is the same though as investors buying in at $38. Employees could always choose to negotiate the grants or leave if they think they are bad value.

The root of my argument though is that as Silicon Valley know-it-alls we assumed the world would gawk in awe of our amazing creation and throw money at us, which it did not. It's a shame you can't buy put's on that, because THAT would have been worth it. :)

People did gawk at the amazing creation and throw money at Facebook needlessly, and that's the problem. In a way, Facebook has been able to do a bit of market segmentation, and take the initial money from those that thought that it had the most value, without having to listen to the dissenting voices that think it's worth less. Typically, markets prevent such a great information disparity.

Before IPO, nobody knows for sure what the real valuation of Facebook is. They have their own personal valuation, but the eventual price on the market is going to be a reflection of the combined valuations, it's an average of sorts of everbody's belief about Facebook's ability to make money over the time scale that each particular investor cares about. You can make a price-demand curve out of it; pre-IPO I wouldn't have bought Facebook at any price, some people thought $15 per share, some people $20, some people $38, and some would have bought no matter what.

Facebook was unique in being able to take advantage of this market uncertainty, namely each investor's uncertainty about what everybody else thinks. They shielded the overoptimistic from the pessimists' views, or the overoptimistic didn't bother to acknowledge that there would be pessimists, and Facebook took the optimists' money first. In doing so they got the most capital for giving away the least possible. (This shwredness probably bodes well for their ability to make money in the future.)

Usually tech stocks go the other way because the company doing the IPO has very little leverage to set their own price; investment banks are the gatekeepers and won't let anyone through unless their customers unless they and their most-favored-customers make a bundle on the initial sale. Facebook was able to flip that dynamic around and make sure that they themselves made a bundle while all the investment banks' customers lost out. It takes both leverage with the investment banks and knowledge of the demand curve in order to pull something like that off.

If the overoptimistic end up being right on the long enough timescale, they'll get their money back. But for the moment there are too many pessimists about the future potential of Facebook for a $38 buyer to be able to get what they deem a fair value.

Buy low, sell high, simply means being optimistic when others are overly pessimistic, and being pessimistic when others are overly optimistic. There's a bit of predicting what the objective financials of a company are, but it's far more about realizing the psychology of everybody else with money to trade. It's not just Silicon Valley engineers that are overoptimistic...

Re: The market doesn't care about your overpriced valuation (Failbook)

#28

Post by ChuckMcM »

wkasel wrote: post #10
ChuckMcM wrote: post #4

Earlier quoted context omitted.

Seems a bit snarky to me. Engineers don't price IPOs, bankers do. And because of that it reads more like "I'm really pissed off you are now rich and I am still not rich." or perhaps "I thought it was going to go through the roof and so I bought some and it didn't so I lost a lot of value and now all this stuff that I'm reading makes me look stupid for having believed it in the first place." I've mentioned elsewhere t…

Interesting assessment. I live in Silicon Valley, I don't own a share of FB, I do trade frequently. Like you, I made an assessment. My frusteration comes mostly from reading on tech blogs what Facebook "needs to do". Techcrunch acts like they are Bloomberg or something, which goes exactly with my broad brush stroked point as you said. It's actually the valuation I care about vs. the stock price, but people tend to un…

Ok, I think it would be more effective for me then if you started with what you cared about and why you cared about it.

So your frustration is with blogs, written by people who are paid in proportion to how angry or scared they make their readers, using Facebook as a stalking horse to drive page views? I can certainly understand if that is the case, why not say that?

Instead you said this : "The root of this problem is core to the DNA of Silicon Valley types. "

You didn't say the people who blog about Silicon valley (heck they may not even live here) you just said "Silicon Valley Types" which covers a lot of people, many of whom like the folks who founded Y-Combinator probably don't think of themselves a collective that "These character flaws are why we (the collective known as Silicon Valley) thought that a company with piss-poor revenues could IPO at an overpriced valuation, and have the same fan fare for over-valuation as it did in the valley. "

You impeach yourself by calling Facebook's revenue 'piss poor', it isn't, and then accuse "us", those who live in Silicon valley, with 'over valuing' when in fact that was the work of a collection of banks, based primarily in New York city.

I would love to hear passionate, pointed, editorial about how bankers and journalists unknowingly (or perhaps knowingly if you are the conspiracy type) in the creation of a value perception, but its a hard case to make here. There were literally years of trades in FB you could look at from SecondMarket, and there are a number of pretty cogently written analyses of their business model and the potential of their business. The Techcrunch whine about how it's not the bubble they were hoping for, and were so sure it was, will pass. And a lot of young people who weren't here for the dot com fiasco (or at least they weren't watching it closely) could learn from clear insights about what really makes a company worth a billion dollars to investors, or worth a hundred billion.

You could do that instead, start from what you care about and bring us along as readers, telling us why you care and perhaps educating us as to why we might want to care as well. That may or may not be effective, but it certainly would be less snarky I expect.

Re: The market doesn't care about your overpriced valuation (Failbook)

#29

Post by [deleted] »

jussij wrote: post #25
epistasis wrote: post #20

Earlier quoted context omitted.

No, that's wrong, the only way an initial overvaluation hurts pre-IPO investors is if the stock gets delisted, or the market is so offended that it starts caring and undervalues the company. Otherwise, employees are just fine; Since the market doesn't care, it gives them fair value when they have a chance to sell. They lose out on cashing out during the over-valuation period, but that was just free money for those th…

> but that was just free money Except the employees would have been sacrificing a higher salary for these shares so they where hardly free. > The only people hurt by the initial over valuation were the people that bought high The people that got burnt where those that read the IPO document and assumed it was not a work of fiction. The people that made money where insider trading on information not yet public. The oth…

[deleted]

Re: The market doesn't care about your overpriced valuation (Failbook)

#30

Post by aniro »

robbiep wrote: post #24
wkasel wrote: post #22

Earlier quoted context omitted.

Well said. You're exactly right. I didn't cover it, but the larger concern I have here is that this misguided approach could lead to distrust from wall street of any tech IPO's that aren't enterprise, or low/mid cap.

This is not a new phenomenon though. Look at tech bubble #1. hell, go back in time and look at Tulip Mania or the railroad bubble in the late 19th century. Wall Street will continue to do what is in it's interest. With average returns from Underwriting an IPO in the range of 7-9% they have to. Wall Street doesn't care that mum and pop investors get screwed - they just need to know that there are more out there that w…

The gist of that article is that the number of firms going public or using capital markets to raise equity has diminished in favor of private-equity, irrespective of the number of firms in existence.

Most of the reasoning behind it appears to be that the legal system has been modified in such fashion that it favors other forms of firm structure.

Hardly indicative of any natural decline, it would be easy to take from this article that the Pump & Dump style IPOs (and other massive erosions of trust) are strangling the effectiveness of Capital Markets by scaring away investors and inviting increased regulation.

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