Wed, Oct 24, 2012 - Page 9 News List

How Facebook’s social networking dominance failed to monetize

In May, Mark Zuckerberg was worth US$20 billion. Last month, that figure had fallen to US$9 billion. What went wrong?

By Tim Adams  /  The Observer, LONDON

There is much talk of a “pop” on the news networks: “Do you think we will see a pop?” “How big a pop do you think there will be?”

The pop in question refers to the explosive growth as the stock hits the market, like a kernel of corn reacting to a hot pan. For those few cynics among the faithful — who perhaps have a working knowledge of Charles Mackay’s 1841 volume Memoirs of Extraordinary Popular Delusions and the Madness of Crowds, or who at least had, as they like to say, “drilled down into the figures” and placed their bets accordingly — that pop was also, you guess, the sound of bubbles bursting.

Nearly six months on, those doubters with their sober analysis or contrarian instincts, who gambled against Facebook stock from the beginning, have been counting their winnings. Daniel Niles, who runs the AlphaOne Capital Partners, made millions of dollars for his investors by “shorting” Facebook the moment it opened for trading at US$42 a share. Shorting involves borrowing quantities of shares and selling them at the high price, waiting for the price to fall, then buying other cheaper shares to return to the lender and pocketing the difference.

Niles explained his analysis as follows: “If you looked at Facebook, the good news was you had a very public comparable company with a lot of the same issues and good things going on, which is Google. To some extent, it was like two houses on the same block ... But you look at Google, and investors were valuing it at roughly six times annual revenues; and you look at Facebook, and despite it growing [only] twice as fast as Google, they valued it at about 24 times revenue ... To me, this looked like a recipe for disaster, and that’s why we shorted at the open.”

Another such investor, representing a major fund, described his decision with slightly less mathematical nuance: “My mother asked me to get Facebook shares and she has never been interested in IPOs [initial public offerings] before. A cab driver asked me about the IPO, too. That’s when you want to short it.”

On the first day of trading, markets reported that the share price had been propped up by Morgan Stanley, the bank that had acted as the lead underwriter in the sale on Facebook’s behalf. What had looked like a major coup for the bank’s Silicon Valley investment chief Michael Grimes quickly became a headache. In an attempt to defend the US$38 opening price, some observers suggested the bank may have spent US$1 billion dollars buying back stock, though Morgan Stanley will not comment on the issue.

A few even among the closest circle of Facebook believers were perhaps not quite as faithful as they at first seemed. Peter Thiel, the canny founder of PayPal, who had invested US$500,000 in Facebook in 2004, cashed in a thousand times that on the first day of trading. On the right side of things as ever, Goldman Sachs, which had bought a US$500 million share in the company in November last year, sold about another US$1 billion dollars straightaway, as did Zuckerberg, in what turned out to be nice wedding gift to himself when he tied the knot with his long-term girlfriend Priscilla Chan in a surprise ceremony the day after flotation.

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