February 07, 2012
Dean Baker
Al Jazeera English, February 7, 2012
See article on original website
The big business news last week was that Facebook is going public with an initial public offering (IPO) that is likely to place the market value of the company in the range of $100 billion. This price would put Facebook among the corporate giants in terms of market value.
By comparison, Goldman Sachs, of vampire squid fame, has a market value of $55 billion. Ford’s market value is less than $16 billion. With its current market value near $106 billion, Facebook would even give a serious run to Verizon, the giant telephone company.
While the implied value of Facebook is impressive, a question that was raised in several stories was whether the company would really be worth this much money. Some simple back of the envelope calculations show that Facebook would have to gain an enormous share of advertising expenditures over the next 5-10 years in order to generate the sort of profits needed to justify this current price.
Of course that doesn’t mean it’s impossible; Google went public with a very high market capitalization in 2004. Less than eight years later its stock price has gone up by a factor of six. Someone would want to do some serious homework before ruling out the possibility that Facebook is actually worth its current stock price.
At the same time, there have been numerous cases of companies becoming market darlings which were most definitely not worth the price. The best example of a failed market darling is probably the Internet giant AOL, which had a peak market value of over $220 billion in 2000. The price tag for AOL today is $1.8 billion.
In the case of AOL, the founders managed to cash out before things went sour. It used its stock to buy Time-Warner, one of the largest media companies in the world. In effect, AOL got Time-Warner to sell itself for nothing, since the value of the AOL stock used in the purchase would soon be a tiny fraction of the value of Time-Warner.
The big losers in that story were the shareholders of Time-Warner, who saw a big hit to the value of their holdings. Needless to say, the executives who engineered the give-away of Time-Warner did just fine, walking away with tens of millions of dollars.
And the top executives at AOL, most notably Steve Case, its co-founder, also did fine. The deal allowed Case to walk away with billions of dollars, making him one of the country’s richest people.
Suppose that Facebook ends up looking more like AOL than Google; who would be the losers and who would be the winners? Well, the losers would be the people who jumped on the stock near its peak. If it turns out that Facebook is just an overnight sensation that is either unable to hold onto its market share or to effectively turn its massive social networking franchise into a money making outfit, then people buying its stock near its IPO price will have thrown much of their money in the garbage.
If individual investors knowingly take this risk and end up losing; that is the way markets are supposed to work. Insofar as the purchasers are institutional investors who end up losing money for pension funds, university endowments, or mutual funds in 401(k)s, it will raise serious questions as to whether the managers of these funds were doing their homework or just got caught up in investment fads, as they have so many times in the past.
On the other side we have the early Facebook employees who will walk away with millions, and of course its founder, Mark Zuckerberg, who stands to walk away with tens of billions. At a time when there is new attention being focused on inequality and the one percent, it is interesting to ask what Mr. Zuckerberg — who stands to rank at the very top of the one percent — has done for his money.
If it turns out that Facebook goes the AOL route, then Zuckerberg will effectively be the P.T. Barnum of the social media economy. He will have succeeded in creating incredible excitement and buzz that led people to voluntarily give him their money for nothing.
The result will be that many people will be somewhat poorer and Zuckerberg will be incredibly wealthy. He will be able to buy whatever he and his friends and family might want as long as he lives. He will be able to promote whatever philosophy he likes (e.g. school reform based on test scores) through charitable donations and political contributions. And, the media will treat him as a person with brilliant insights for the rest of us on how to run the country and live our lives until the day he days.
This is a process whereby we redistribute money upward to the very rich. In this case, the key actors are highly paid money managers who don’t know anything about managing money, just as in the AOL case it was incompetent executives at Time-Warner. In a properly working market economy these people would pay an enormous price for such disastrous incompetence, but that doesn’t describe our current economy.
Of course we can always hope that Facebook is really worth its market price.
