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Time to Rage

Co-founder of FinLitTV. Former investment banker and UVA Grad in NYC. Passionate about solving financial literacy. Love sports
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Really smart analysis from Roger Ehrenberg on the aftermath of Facebook IPO talking about what is the nature of relationship a company wants to have with investors? 


Andrew Ross Sorkin’s missive on mistakes made in the Facebook IPO has given rise to some strong emotions. While Andrew sought to lay much of blame at the feet of Facebook’s CFO, some others (here and here) view the CFO’s responsibility as simply being to get the highest price for the…


As Facebook’s stock drops lower and lower (now under $18, less than half of the IPO price), there have been several articles over the past few days trying to assign some blame for this situation.

Andrew Ross Sorkin from the New York Times wrote a scathing article yesterday assigning the majority, if not all, of the blame on Facebook’s Chief Financial Officer.

Mark Cuban wrote a spirited response saying that the CFO did a great job for Facebook in maximizing the IPO proceeds. He also makes the valid point that the CFO’s job is not to please traders and investors but to manage Facebook’s finances and put the company in the best possible position to succeed financially. An extra few billion dollars from the IPO does just that.

There is no simple or easy answer to the question of who to blame for the fallout from Facebook’s IPO.

From a corporate finance perspective, Facebook’s IPO was a resounding success. However, from an investor perspective it has been a fiasco and lead to pretty large losses for many traders/investors

That being said, if you invested in Facebook at the IPO you have no one to blame but yourself (like I did) because the warning signs were clearly there in advance of the IPO.

Here is a pretty entertaining counterpoint to Sorkin’s article that praises the CFO, which is reblogged in full below:


Original (unadulturated) article located on the NYTimes website

The Man Behind Facebook’s I.P.O. Debacle Miracle

It is David Ebersman’s fault accomplishment. There is just no way around it.

Mr. Ebersman is Facebook’s well-liked, boyish-looking 41-year-old chief financial officer. He’s not as well known as Mark Zuckerberg, Facebook’s founder and chief executive, or Sheryl Sandberg, its chief operating officer and recently appointed director.

But when it came to Facebook’s catastrophe master-stroke of an initial public offering — the Company financed itself with sales of stock at more than double the price reached a new low on Friday, closing when it closed at $18.06 — it was Mr. Ebersman, not Mr. Zuckerberg or Ms. Sandberg, who was ultimately the one pulling the strings.

Now, three months after the offering, the company has lost more than $50 billion in market value. Let me say that again for emphasis: Facebook’s market value has dropped more than $50 billion in 90 days.

To put that in perspective, that’s more market value than Lehman Brothers gave up in the entire year before it filed for bankruptcy.

A lot of ink has been spilled over Facebook’s I.P.O., with investors and pundits mostly pointing the finger at lauding the Wall Street banks, particularly Morgan Stanley, which led the offering, and at Nasdaq, whose numerous computerglitches systems on Facebook’s first day of trading undermined confidence in facilitated many billions of dollars of transactions in the stock. They clearly deserve blame credit.

Mr. Ebersman’s name, however, is mentioned only occasionally, usually in passing and typically only among Silicon Valley’s cognoscenti.

And yet if there is one single individual more responsible than any other for the staggering mispricing of Facebook’s I.P.O., 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 $29 to $34.

He — almost alone — pushed to flood the market with 25 percent 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.  Nor should he; he has a company to help run.

At a time when investors are looking for some semblance of accountability on Wall Street and in corporate America, it is remarkable and sad that nobody — no bankers, no one at Nasdaq, no one at Facebook — has yet been promoted firedfor botching so skillfully executing the offering.

Mr. Zuckerberg reportedly told his employees after the I.P.O., “So, you’ve heard we’re firing David?” But it was only a joke.

Facebook’s falling stock price is not just a problem for investors day-traders and momentum-driven speculators; it is quickly not creating any new real questions inside the company about its ability to retain and attract talented engineers, the lifeblood of any technology company. Early employees have been leaving Facebook for new ventures and and a more entrepreneurial environment for many years and they’ll continue to do so, regardless of the stock price.

Employees who joined the company starting in 2010, for example, are now holding onto restricted shares that were granted at a higher price — $24.10 — than the current trading price. (It should be noted that these are restricted stock units that, not underwater stock options, so they do still have real value, but not nearly what the employees had expected.) Those are the breaks.

Employees with some two billion shares will have the opportunity to begin selling them this fall, which is one reason Facebook shares have been depressed latelyand they undoubtedly will.

A spokesman for Facebook, Elliot Schrage, declined to comment and would not make Mr. Ebersman available.

Mr. Ebersman appears to have badly exquisitely misjudged the demand for Facebook’s I.P.O. He was aided by errant excellent advice from a cadre of banking advisers, who, like him, all had an incentive to sell as many shares as possible at the highest price possible. Morgan Stanley liked $38 a share, JPMorgan Chase thought the shares could be sold for even more, while Goldman Sachs thought they should be sold for slightly less — but all of them quickly jumped on board when Mr. Ebersman made his final decision.

Determining the price of an I.P.O. is as much an art as a science. After a company’s roadshow presentations, investors indicate how many shares they plan to buy. They typically ask for more shares than they expect to receive, sometimes twice as many. But in the case of Facebook, investors, anticipating huge demand, put in requests for triple or quadruple the number of shares they expected to get. This calls to mind the old Wall Street adage, “Bulls make money, bears make money, but pigs get slaughtered.”

The bankers — and Mr. Ebersman — did not seem to appreciated precisely what was happening. They seem to have believed their own fomented tremendoushype and took those orders as real, giving them the misplaced steely confidence to push the I.P.O. to the highest possible price and issue more shares.

But this wasn’t a traditional I.P.O. and should never have been priced that way. (People close to Mr. Ebersman say that he decided to issue additional shares with the goal of steadying the price this fall when the lockup on employee share sales expired. Consider that another miscalculation.)

Another issue that weighed on Mr. Ebersman, as well as the bank underwriters, was the example set by LinkedIn. Its shares rose 110 percent on its first day of trading. That might sound good, but it meant that the company mispriced the shares so badly that it effectively gave investors a gift of nearly $350 million. Mr. Ebersman was intent on making sure Facebook didn’t “leave money on the table,” according to several people close to him. But by leaving investors with little upside, he may have created additional pressure on the stock. That he was able to avoid doing so in the most closely watch I.P.O. of the decade is a credit to his and his advisers’ handling of the offering.

Both LinkedIn’s and Facebook’s I.P.O.’s should be considered failures — they were extreme examples of what could happen on the upside and the downside. The ideal offering lands somewhere in the middle. Still, There is no question thatexisting investors, employees, and management of private companies would prefer another LinkedIn over a Facebook-like I.P.O. outcome, and they and their well-paid bankers have every incentive and ability to make an example of the company — and Mr. Ebersman — so that other companies don’t try to wipe out that first-day “pop.” do their best to maximize the value of the I.P.O. process to their companies’ treasuries just as Facebook did.

None of this is meant to suggest that Mr. Ebersman is dumb or unqualified. A graduate of Brown who was the chief financial officer of Genentech when he was just 34, Mr. Ebersman is bright, perhaps even brilliant. He was recruited to Facebook by Ms. Sandberg, a hire that was considered quite a coup at the time. He should clearly be given credit for negotiating favorable and extraordinarily large credit lines — $8 billion worth — with Wall Street banks, which could provide the company with an important lifeline should the economy and the company’s fortunes suffer. In this light, the I.P.O. is just accomplishing with the sale of equity the same sort of favorable financing he got on the debt side.

The disclosures in the company’s I.P.O. prospectus — which were Mr. Ebersman’s responsibility — were, for the most part, pretty transparent, giving investors a good sense of the business, despite all the hype. And the I.P.O., for all its failures,filled Facebook’s coffers with some $10 billion. Plus billions more for insiders selling at that same extraordinary rich $38 per share price.

Still, Mr. Ebersman has his work cut out for him as he tries to regain the trust of shareholders. He recently came to New York to meet with big investors, including hedge funds and institutional investors. Some invitations for meetings were oddly, and somewhat imperiously, sent out on Thursday night for meetings on Friday.Given that they are licking their wounds from vastly overpaying for the guy’s stock mere weeks agoit was summer, some investors sent their junior analysts.

When Facebook’s I.P.O. first started to appear troubled obscenely richly priced back in May, I purposely avoided weighing in. Frankly, I thought it was too soon to judge, although people who actually run portfolios were forced to judge then. Those are the breaks!

But we have passed the pivotal three-month mark.

Statistically, the three-month mark is a much better predictor of a company’s future share price than any of the closing prices in the first week or two. According to Richard Peterson of Capital IQ, 67 percent of technology companies whose shares lagged their I.P.O. price after 90 days were still laggards after a year. Until Regardless of whether Facebook’s stock ever rebounds, Mr. Ebersmanand his fortress balance sheet will be feeling the pressure glow from this masterfully managed offering.  Mazel tov!

Ok, let’s be honest. There are a ton of reasons why I’m an idiot, but in the interest of time (and my ego) I’m going to focus on just one of them today. (Don’t worry, I’m sure I’ll bring up many more of them in the future).

After my brilliant (but cheezily titled) post last week that tried to warn everyone to use some caution before investing in Facebook on the day it IPO’d, I went ahead and ignored my own advice, bought some shares, and gambled that Facebook would pop.

I was wrong. Spectacularly wrong.

FB Chart

FB data by YCharts

The IPO price was $38, and the stock reached a high at $45 around 11:30am on Friday, May 18, before quickly falling back to $38. The stock briefly got back up to around $41 or $42 before closing up only $0.23 at $38.23. This was very unexpected as most people expected there to be a significant pop in the stock price on day 1.  

The real carnage happened after the weekend on Monday, as the stock closed at $34.03, down 10.99% from Friday’s close and down a staggering 24.38% from the high of $45 during the day on Friday.  

The only good news is that it turns out my prediction to be cautious was pretty spot on, so at least I have that going for me. 

Okay, so let’s try and figure out what does the last two trading days tell us about Facebook’s IPO:

  • Investors have learned from some of the mistakes they previously made when they overhyped recent tech IPOs and bought shares at extravagant prices. On Friday, they did not give in to the mania that preceded Facebook’s IPO (here is a great visual summary of some recent tech IPOs from the WSJ that may have given investors a reason to be cautious).   

  • The IPO was probably priced too high. The initial IPO price range was $28-$34. The bankers raised the price range to $34-$38 and ultimately priced the IPO at the uppermost price of this range. In retrospect, it appears that the bankers were too aggressive in setting the price.

  • However, this aggressive price allowed Facebook to maximize its IPO proceeds. If the stock had popped after it IPO’d, it would have been a signal that the bankers underpriced the IPO and Facebook would have left some cash on the table by undervaluing its stock.

  • These last two bullet points represent the tension that Bankers need to balance when they set the IPO price. On the one hand, the Bankers have an obligation to the company that is IPOing that wants to raise capital. On the other hand, the Bankers want to make sure that there is some type of price appreciation on the IPO date, which is a sign that investors view the company favorably and that its stock is attractive. Ideally, Facebook would have closed on Friday up around 10-15% so Facebook would have been satisfied it got a good deal and investors would feel that there is a lot of demand for Facebook stock.
  • The investment banks are pretty unhappy because they had to buy millions of shares to support the stock price. Due to a lack of demand for Facebook stock at the prices in the high $30s and low $40s on Friday, Facebook’s investment banks had to buy millions of shares to support the stock price. The reason the banks did this is if Facebook’s stock had fallen before the IPO price on Friday, investors would have panicked and the declines that occurred on Monday would have happened on Friday. 
  • Investors have serious concerns about Facebook’s ability to generate sufficient revenues to support Facebook’s “expensive” valuation (AKA Facebook is overvalued at its current share price)
  • We should not focus on this short-term “paper loss”. 2 days of trading don’t even begin to scratch the surface of Facebook’s future. The reason why I’m not upset about my immediate short-term loss on Facebook is that I still think Facebook will find a way to make enough revenues to make it an attractive long-term investment. 
  • Despite this view, I’m an idiot and should have waited a few days before buying to see how the market reacted to the IPO.

In any case, it has been quite a while since an IPO garnered as much publicity as Facebook and it has been fascinating to follow the mainstream attention it has received. When Facebook releases their quarterly earnings I will likely write another post about the Company to see how they are doing.


Everyone is talking about Facebook’s IPO that is taking place tomorrow. I went to a wedding last weekend and people ranging from my parents to my friends to the DJ (ok maybe not him) were discussing the IPO and whether they should try and buy the stock.

I told everyone the same thing - if you buy Facebook’s stock tomorrow you are doing the equivalent of putting your money on black or red and spinning the roulette wheel.

Now, I am NOT saying that I think buying Facebook stock is a bad idea - in fact, I might buy some tomorrow. What I am saying is that: a) facebook is a risky company to invest in at the current valuation, and b) buying its stock on the day it IPO’s is extremely risky due to what I expect will be massive swings in the stock price tomorrow.

The appeal of getting in on tomorrow’s IPO is obvious - wealthy investors have been trying for years to get their hands on Facebook stock through private stock sales via services like SecondMarket and have been berating their brokers for the past 6 months to get a piece of the IPO at the IPO price, which has apparently been set at $38/share. The IPO Price is the price at which Facebook sells its stock to hedge funds, institutional investors (mutual funds, pension funds, etc.), and the 1 percent (aka high net worth individuals). These stock sales occur before the market opens tomorrow.

For the rest of us poor shmucks who don’t have millions in the bank, there is zero chance of getting in at Facebook’s IPO Price of $38 so we have to wait until the market opens at 9:30 AM tomorrow morning and Facebook starts officially trading on the NASDAQ before we can buy Facebook.

However, since there is so much demand for Facebook stock, it is very likely that Facebook’s stock will open at a price higher (or significantly higher) than the $38 IPO price. And recent data shows that recent tech IPOs have tended not to live up to their initial hype.

CNN has a great article that highlights some of the risks of investing in Tech IPOs. 

Of the 31 Internet IPOs held since the beginning of 2011, 22 are currently trading below their closing price on the day they went public. Here’s an even scarier stat: 16 are trading below their offer price.

Now to be fair, these 31 IPOs did pop a collective 34% on the day they went public. But this proves my point about how risky it is to buy a stock on its IPO day. 

Let’s use an example. pretend Initech has an IPO price of $100. Since there is so much demand for the company’s stock, the stock begins trading at $120 (up 20%). During the day, the stock shoots up to $150 by noon. But some intern bought some traders a crappy lunch, so by 1:30 the stock is down to $110. But then they realize that it’s Friday, the weekend is coming, and it’s time to party so the stock shoots all the way up to $175. Four  months later, when the initial excitement died down, the stock is now trading at a measly $68. 

Sound unrealistic? Who knows. The recent tech IPOs have shown that anything can happen on day 1, and that stock prices don’t always keep going up. If you had bought Initech at the end of the IPO Day around $170, you would be kicking yourself after 4 months.  

Here is my advice - Know your risk tolerance. I’m 25, I have a lifetime (hopefully) of earning potential, and I may or may not have won a little money playing blackjack at a casino in Colorado last night. I can afford to take the risk.

If you aren’t willing to lose a substantial portion of your investment, I would recommend not investing in Facebook tomorrow. Or at least don’t put the whole amount you want to ultimately put in.

Sure, there is a great chance the stock might pop 25% or 50% or 100% tomorrow, but who knows how sustainable it will be. 

If you’re going to buy Facebook tomorrow, remember that you’re playing in a casino and you have a 50/50 shot of landing in the black or red.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. 

- Image from Thinkstock/CNNMoney


In my last two posts, I attempted to analyze the acquisition of OMGPOP, a mobile gaming company, by Zynga, and the acquisition of Instagram, a mobile photo-sharing company, by Facebook.

These acquisitions highlight the recent trend of large, established Web-based companies dramatically expanding their mobile presence.  

Techcrunch’s excellent new co-editor, Alexia (congrats on the promotion), pointed out that Both OMGPOP and Instagram were well on their way to dominating their respective fields on mobile phones.

Instagram had a real chance at being the world’s mobile-only social network, hitting more than 30 million users in a little under two years. Which is why Zuck rapidly panicquired it after it received funding on Thursday, doing the deal in a weekend according to what we’ve heard. Same thing with Zynga target OMGPop, which was showing similar potential for mobile market domination as it overcame the Zynga games in the App Store.

While we can debate whether Instagram and OMGPOP sold too soon (in my opinion both companies made the right decision to sell at their respective price points), there is no doubt why they made attractive targets for Facebook and Zynga.

As Business Insider’s detailed presentation on the Future of Mobile points out, in a couple of years the number of mobile phones will dwarf the number of PCs. While we may think smart phones are already ubiquitous, there still is massive growth potential in this market as more traditional cell phone users see the appeal of smart phones and switch to have a better mobile experience.

We are only going to spend more time on our phones going online, interacting with friends, being terrible at Temple Run and Draw Something (like me), and paying for everything with our phones. While mobile advertising has yet to be perfected, it is clear that mobile phones will play a crucial role in the future of tech companies.

Zynga will be able to use OMGPop to build out its mobile gaming team, and Facebook can use Instagram to supplement its mobile app and “own” photo-sharing. These acquisitions have allowed both companies to become the dominant, go-to company in the gaming and photo-sharing fields.

I think the next industry a giant, web-based tech company is going to pursue is mobile finance. Companies such as Venmo, Dwolla, and Square are attempting to figure out ways to make mobile payments easier for customers and businesses, and I think companies like Amazon and Apple want to figure out a way to have a simple, seamless way to pay for everything on your mobile phone. I can definitely see one of these mobile payment companies being acquired by a web company that wants to expand its presence on your mobile phone.

Image via

Mark Zuckerburg announced that Facebook was acquiring Instagram for $1 billion yesterday, which set off a firestorm of blog posts, tweets, and news articles debating whether this was a sign of a bubble or if Instagram sold out too soon. I think Facebook needed to pay $1 billion to make the deal happen, so I thought I would offer my 2 cents on how Facebook could try to justify the $1 billion figure. 

I’ve never really valued a company without any revenues before. Since I’m a restructuring banker, I have valued several companies that are massively cash flow negative, but they (or at least their management teams) all generally have rosy projections that increase their revenues higher than their costs within 3 to 5 years which give me something to work with when performing valuation analyses. 

I’m sure Kevin and Mike, the brilliant co-founders of the delightful photo-sharing app Instagram, have a plan for generating revenue for their company at some point in the future. 

3 Traditional Methods to Value a Company Don’t Justify $1 Billion Price

However, the fact remains that the 3 traditional ways to value a company (DCF, Precedent Transactions, and Market Multiples) won’t help us justify the $1 billion sale price. 

  1. DCF - Since Instagram has no significant revenue at the moment and is unlikely to be cash flow positive in the near term (despite extremely low overhead with less than 15 employees!), there is no way a DCF could support a $1 billion valuation.
  2. Precedent Transactions - The only relevant precedent transaction might be Yahoo’s 2005 acquisition of Flickr for $35 million, but there isn’t much publicly available information on that transaction for us to use as a comparison. I know Instagram has 30 million users, but the ~$33 Sale Price / User multiple is meaningless without something to compare it to. I guess I could compare it  to OMGPOP’s ~$210 Million Sale to Zynga, which implied a ~6 Sale Price / User multiple, but games and a photo-sharing app really aren’t that comparable. 
  3. Market Multiples - Unfortunately, there aren’t really any of comparable public companies available for Instagram.

Great. So, if I’m trying to use traditional valuation methods to quickly value Instagram, I can’t really make any significant conclusions due to the lack of available information. 

Since Early-stage, high-growth start-ups often have little to no revenue, they routinely need to raise funding to support operations. These fundraising rounds come with a negotiated valuation of the company at the time of the financing so that the company (i.e. founders) can issue shares to the investors at a set price they both agree on.

Instagram Raised $50 Million at a $500 Million Valuation Last Week

In a surprising move, Instagram reportedly raised $50 million of additional funding late last week at a $500 million valuation from a group of several top venture capital firms. So, it should be simple, right? If Instagram was worth $500 million on April 5th, shouldn’t it probably also be worth $500 million on April 9th, just 4 days later?

Well, it depends (shocker!). There is a major difference between financial investors (a VC fund, hedge fund, Private equity firm, etc) and strategic acquirers (other companies, usually in a similar industry). The subject company is more valuable to the strategic acquirer for 2 key reasons:

  1. Control - The strategic acquirer generally purchases a majority (>50.1%) of the company, which allows them to control alll operations of the company. On the other hand, financial investors generally have a minority stake in the company, which does provide some control through Board Seats but is not sufficient to make unilateral decisions. Even if a financial firm acquires a majority of the company, the company will still be more valuable to the strategic because of #2.
  2. Synergies - Ahh…probably the favorite word for M&A bankers, synergies are the rationale for all corporate acquisitions. Synergies are the benefits that can increase overall value through a merger of the two companies. These benefits always come down either to increased revenue opportunities by aligning the products or (more likely for traditional M&A) a chance to cut costs by reducing redundant operations/headcount.
For these reasons, strategic acquirers pay significant premiums to purchase controlling stakes in companies. 

Why Instagram is Worth More than $500 Million to Facebook 
Okay, so we know that Instagram was worth $500 million to financial investors 4 days ago, now let’s look at why it might be worth more to Facebook.
  • Facebook Now “Owns” Photo-Sharing (Online and Mobile) - At its core Facebook is a photo-sharing service. People spend hours each week on the website looking at photos, often in a creepy, voyeuristic ways. But Instagram is a fast-growing mobile app with 30+ million users, a number that will undoubtedly grow rapidly now that it is available on Android and due to the publicity of the Facebook sale. Instagram allows Facebook to own the photo-sharing space both on the web and on mobile.
  • Facebook Took Out its Biggest Rival - Taking a picture on Facebook on your phone sucks. It takes 6 screens on the mobile Facebook app before you can take a picture vs. just 1 screen for Instagram. Instagram is ridiculously easy to use and most of its users love it. As more customers adopt smart phones over the next few years, Instagram is poised for fantastic growth and now Facebook can capture that upside potential. If Instagram remained a private company, Facebook would have many reasons to be concerned about Instagram’s dominance on mobile phones. As angel investor Chris Dixon said in this tweet:
Giving up 1% of your market cap to take out biggest threat is a savvy move.
  • Keeping Instagram Away from Google - Google has seen Facebook’s strength at all things social and has desperately tried to come up with ways to compete (see tying bonuses to success with “social”) but seems to be striking out with each new product launch - Wave, Play, and Google+ either have failed or haven’t really taken off. Instagram would have been a fantastic opportunity for Google to hit Facebook hard at its core competency of photos, and Facebook made a great strategic move to beat them to the punch in acquiring Instagram.
  • Strong Existing Ties to Facebook - Instagram is already hugely tied to Facebook’s Open Graph (I mean check your your News Feed - I feel like 50% of it is Instagram photos, whether I want to see them or not). Most people have their Instagram pictures set to seamlessly integrate with Facebook, so there is a natural fit between the two products. Also,it should be relatively easy for Facebook to utilize its additional sales staff to begin to generate revenues from Instagram.
  • Good Timing - Facebook is set to IPO next month. The $1 billion sale price is a combination of cash and stock, but the majority is likely to be in pre-IPO stock. Facebook doesn’t have to deal with any public company hassles of buying another company such as being worried about the effect of the acquisition on its stock price.  
There are just a few of the strategic reasons why Instagram was an important acquisition target for Facebook, all of which call for a premium to the $500 million valuation. 

Okay, So Why $1 Billion?

Instagram had all the leverage. They just raised a massive round of funding and the founders were perfectly willing to use the money to build a bigger business that could challenge Facebook. I’m sure Google has expressed interest over the past few months and Apple may be sniffing around to get a hit in something social, so there were likely no shortage of suitors. Anything less than a massive premium to the $500 million valuation and the co-founders would have said “Hell No” and gotten back to grinding to build a multi-billion dollar business.

Also, Facebook didn’t want to make the mistake that Yahoo repeatedly made in failing to close deals with Google (in 2002) and Facebook (in 2006).

While the $1 billion may seem excessive, it was the price needed to get a crucial deal done and I believe Facebook made the right decision in making this acquisition. 

(Note: Thanks to Hamza for pointing out a typo in an earlier version)