Diary of an IPO: Facebook is the Internet Bubble 2.0

Posted by on May 17th, 2012

Tomorrow Facebook will go public with a stock price as high as $38 and a market value of more than $100 billion.

This is great news for all the insiders who are selling shares and the institutions who are able to get in on the deal since they pay the mega bucks to the investment bankers on the book. But it is terrible for the little guy who will only be able to buy shares in the open market once the deal prices and the shares start trading (at a huge premium to the company’s true value).

Remember the year 2000? I do. But apparently the “30-something” bankers and portfolio managers don’t. And why should they? In 2000, they hadn’t even graduated from college. This is not meant to be disparaging , but more of a lesson in learning from the relatively recent past! As philosopher George Santayana famously said, “Those who cannot remember the past are condemned to repeat it.”

I believe that Facebook is the second coming of the Internet bubble and many people will be sorely disappointed (and poorer) when it bursts.

I can’t blame the financial folks for taking advantage of a naive market under-educated on how companies should be valued.  At the same time, we shouldn’t stand by and let everyone conveniently forget what happened to companies like Razorfish, Pets.com and eToys and an irrationally exuberant stock market that precipitated the penultimate recession.

As a former lawyer, I am a believer in the concept of let the buyer beware. Hopefully my series of blogs on Facebook will cause individuals to think twice before investing in the company only to find out (in the not too distant future) that their investment is worth significantly less.