Like arrival of a circus into a Wild West frontier town, the float of Facebook is promising to be the biggest and best show ever seen on the world’s stock markets.
It’s valuation – at $US100 billion ($98.5 billion) – is as staggering as a man bending steel, given that the figure is 100 times the company’s net profit in 2011 of $US1 billion.
As required in a prospectus – Facebook’s is 187-pages long – the risks of the investment are clearly outlined.
We look at the risks mentioned, and not.
1. Zuckerberg doesn’t rank making money as top priority.
In the Facebook prospectus, Mark Zuckerberg writes a letter to shareholders to describe his vision for the company’s future, and it is a transparent one. He is not in it for the money.
“Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected,” he writes.
And later: “Simply put: we don’t build services to make money; we make money to build better services.”
While many current investors will become instant millionaires, Zuckerberg is warning new investors that the ride to prosperity might be a long one. The money does not matter to him.
2. Zuckerberg is key to Facebook’s brand.
The 10th of the 13 risks in the prospectus reads: “The loss of Mark Zuckerberg, Sheryl K. Sandberg, or other key personnel could harm our business.
Despite its position low in the list, it seems to be among the highest. Even Zuckerberg is mortal and it is hard to see how Facebook without Zuckerberg would be worth much. He is its face, its legend, its visionary and innovator.
3. Zuckerberg doesn’t care enough about Facebook’s customers.
“We generate a substantial majority of our revenue from advertising. The loss of advertisers, or reduction in spending by advertisers with Facebook, could seriously harm our business.” General Motors last week pulled out of its $10 million advertising spend with Facebook, saying it gets more value out of the free parts of the Facebook service.
4. Facebook’s net profit is, well, not that much.
A price-to-earnings ratio of 100 puts Facebook in a league of its own. Facebook made a net profit of $US1 billion in 2011. That achievement is largely down to his relatively recent hire and second-in-charge, Sheryl Sandberg.
General Motors, which has a market cap of $US38 billion, made a profit of $19 billion in 2011. “We may not be successful in our efforts to grow and further monetise the Facebook Platform.” Seems like a big “if”.
5. Zuckerberg’s iron control is corporate governance madness.
This is one common thread in almost every corporate collapse: a dominant, all-powerful CEO, unchecked by a strong and independent board.
The biggest corporate collapse in Australia, HIH Insurance, had much to do with the unquestioned exercise of control by its CEO, Ray Williams. Jeff Skilling, the former CEO of Enron until months before its collapse into bankruptcy, is now serving a 24-year sentence for felonies conducted while he led the company. Skilling received $132 million in his first year at Enron.
No one is saying Zuckerberg has anything but the highest moral character and standing, but his dominance of control of the company contravenes every insight learned about corporate governance.
He own 56.9% of the votes, and will be free to single-handedly appoint directors (to whom he is supposed to answer on behalf of shareholders) and will also be able to name his successor – the key role of any board of directors.
The following statement of risk – “Our CEO has control over key decision-making as a result of his control of a majority of our voting stock” – appears understated.
Source: The Facebook prospectus and LeadingCompany.