Facebook IPO: Turn that 'like' thumb upside down [The conversation]
Facebook filed papers for an IPO on Wednesday. Not everyone is celebrating, though. In anticipation of the news, critics began questioning Facebook's direction as a company, raising the following questions.
Are IPOs really good for businesses?
The IPO has become such a standard feature in our culture of casino capitalism that we tend to take it for granted, as if it were what all companies aspire to, and always have. But as [Roger Martin, dean of the Rotman School of Management in Toronto] points out, the first 30 years or more of American business in the 20th century were dominated by semi-public or privately held companies run by entrepreneurs or owner-managers. "We're in an odd period right now," says Martin. "We thought that being publicly traded was the way to go. But it turns out not to be right: You can't build a company and its value over the long term given how the expectations market jerks companies around. I see us coming back to the days of privately held companies because of all the problems associated with being publicly traded."
It might turn out that this period of IPOs and publicly traded companies isn't the norm -- it's actually a passing fad, a financial anomaly.
Will Facebook shares hold their value?
Can we get real? The best way Facebook could protect its ordinary users is by not letting them anywhere near this IPO.
For one thing, given the turbocharged excitement surrounding the coming deal, the likelihood is much greater that the shares will be fully valued than that they'll harbor hidden treasure. It won't be long before the holders of insider shares, including current and departed employees, will be able to cash out, diluting the market price further.
Isn't it better to invest in a company before it goes public?
You get the idea. The idea that Facebook is worth $100 billion, or even $75 billion, is, well, a bit optimistic. Or would be, if there were anything rational about this deal. But there isn't. […]
The fault lies with private investors who have driven this company up so much in private markets that it's been picked clean, leaving little upside for public investors. Something similar happened to Zynga, which had been so overpriced in private funding rounds that its IPO price was actually lower than what it fetched from T. Rowe Price, Fidelity, and others.
That sort of thing isn't supposed to happen. But this is the brave new world of tech investing. With Facebook, and some of the other new tech companies, the smart money has already got in and got out long before the IPO ever happens.
Isn't this much ado about nothing?
It won't unleash corporate capital spending. In 1995, Netscape's IPO spurred a wave of corporate capital spending. That's because the web browser made the Internet easier for people to use than it had been before. A wave of supporting industries ranging from web consultants to makers of Web infrastructure -- that got their fingers into the corporate Internet investment pie, as I described in my 1998 book, Net Profit. Facebook is not doing that -- its revenues represent a mere 1% of the world's $507 billion in total ad spending and its IPO would not lead to a major change in the trajectory of corporate spend. […]
It won't boost the overall venture financing market. If a Facebook IPO created a fever to invest in tech start-ups, it might be good for the venture capital industry. But since the IPO does not change much for Facebook investors, does not spur the growth of a range of related industries, does not unleash corporate investment, and might not even help out the IPO market, the after-effect of Facebook's IPO could be modest.
--Alexandra Le Tellier
Photo: A sign with the "like" symbol stands in front of the Facebook headquarters in Menlo Park. Credit: Justin Sullivan / Getty Images