The major business news story this morning was the fact that
Facebook fell four points or a little over 11% in its second day of
trading. It led the business pages of The New York Times and Yahoo!, Google
and National Public Radio’s business news.
Here in western Pennsylvania, the political cartoonist Rob Rogers shows
two kids doing their homework and their father shouting, “Why aren’t you on
Facebook?...I bet your future on that stock.”
All of this posturing and conjecturing about a complete
non-event, a sure sign that the business media are suffering from celebritiosis,
the disease that makes sufferers read gossip columnists, go to expensive
restaurants in New York or Los Angeles looking for celebrities, and use the same
brand of shampoo as their favorite athlete.
Here is the pattern that the prices of virtually all initial
public offerings (IPO) of hot concept and techy companies follow:
1.
The day the stock opens it either goes higher,
stays the same or declines.
2.
The stock goes down significantly in the three
to five days immediately following the first day.
3.
Sometimes the stock starts to climb, sometimes
it stays the same, sometimes it drops more, but…
4.
Within a time period of the first 3 to 6 weeks,
the stock drifts down significantly. The reason I think this precipitous early
decline occurs is that people who want to buy an IPO the first day have another
form of celebritiosis, and so pay up for the stock.
Let’s compare the end of the first day of trading to a low
point 3-6 weeks later for some prominent recent IPOs:
Stock
|
Opening Date &
Close
|
Date & First
Big Low
|
Groupon
|
11/4/11: $26.11
|
11/28/11: $15.24
|
LinkedIn
|
5/19/11: $94
|
7/20/11: $63.71
|
Angie’s List
|
11/17/11: $16.26
|
11/30/11: $11.56
|
Zynga
|
12/6/11: $9.50
|
1/9/12: $8.00
|
But there’s a fifth stage called everything after that in which some of the stocks do great and some fade into oblivion. Check out what happened to these four stocks and you’ll see that this early showing predicts nothing.
In other words, what a stock does in its first day doesn’t
matter. It’s going to go down, after which anything can happen.
Thus, after one day of trading, all we can say about
Facebook is that so far it’s behaving like every other stock and that means
that the stock is probably going to lose a good part of its value in the short
run, like every other IPO does.
And none of that is any news.
Let’s face it. Facebook, like Apple (and Microsoft years
ago), has become a celebrity company, the business version of Cher, Justin
Bieber or Snooki. There is no doubt
about it: celebrity culture has invaded the business sections of our mainstream
media. The business media also extensively covered Zuckerberg’s marriage. It makes perfect sense that the Gossip and
Celebrity sections of the newspaper cover the marriage of a young and glamorous
billionaire. But the front page of the business section ? And a follow story on
the pre-nup the next day?
One function of celebrity news is to distract us from real
news, and we couldn’t find a better example than the Facebook IPO. Media focus
on whether Facebook’s stock price would have a hot run over a short and
meaningless time frame crowded out coverage of what’s happening to the Facebook
IPO money: it’s making a lot of people rich, which is different from providing
capital for expansion and job creation. Some of the money will be invested in the
business, but a good chunk of it just pays off Zuckerberg and his early
investors and employees.
But that’s not where the money stream ends. For making Zuckerberg and his associates
enormously wealthy, those who buy the stock will only have to pay 15% capital
gains tax on any money they make when they sell the stock, and if they lose
money they get a tax deduction. Moreover,
the people who buy the stock from its first owners contribute nothing to either
Facebook or its founders; yet they get the same tax break as the first
purchaser of every share of public stock. Why do they get these tax breaks when
no real jobs are created, certainly by the second buyers of the stock?
But the media never gets into these issues because it
focuses on the triviality of the IPO’s stock price.
The bogus stock price story not only squeezes out coverage
of more interesting aspects of the IPO and Facebook’s financials, it also
squeezes out other, more important stories.
Neither NPR nor The Times in the
national hard copy edition covered the announcement that text book publisher
Houghton Mifflin Harcourt has entered Chapter 11 bankruptcy. (The Times did have an article online on May
21.) The bankruptcy was never a feature
business story for either Yahoo! or Google news the dozen or so times I have
checked since the Chapter 11 announcement came out. The reason I found out
about it was because I read it in a small paragraph in the round-up column of
the Pittsburgh Post-Gazette.
It’s an interesting story because it’s a pre-packaged
Chapter 11, meaning that before the filing, the publisher cut a deal with the
creditors (the ones to whom the publisher owes money), who will get total
ownership of the company in return for agreeing not to get paid for $3.1
billion they are owed. Creditors go for
this kind of refinancing as the only way to get their money back: if it keeps
operating, Houghton Mifflin has a chance to make enough money to repay the new owners.
If it went out of business, everyone would lose.
The $100 billion IPO of Facebook deserved the extensive coverage
it got, but the second day coverage of Facebook’s stock price following an
ordinary pattern was less important than a text book behemoth handing itself
over to the banks and bondholders to whom it owes billions of dollars. Zuckerberg’s marriage—that nonsense deserved
zero coverage in the business pages.