A Tale of 3 Tech IPOs and the Punditry Narrative

When LinkedIn IPO'd in May 2011, underwriters priced the offering at $45 per share. The stock closed the day up 109%, at $94/share. Henry Blodgett at Business Insider quickly published an article entitled "Congratulations LinkedIn, You Just Got Screwed Out of $130 Million," bashing the underwriters for misreading demand and reaping immense profits for themselves at the company's expense. Blodgett wasn't alone in critiquing LinkedIn's underwriters, as the media and financial commentators worked into a frenzy about just how poorly the IPO was priced. Jim Cramer chimed in with his own fury over how the underwriters "juiced" the IPO.

As Facebook geared up for its IPO, to much enthusiasm, people were asking whether Wall Street would avoid doing what it did to LinkedIn (aka "robbing" them) by pricing the offering fairly. A "fair price" would enable the company itself to maximize its own proceeds. In response, Facebook was priced as aggressively as possible. It was priced so aggressively that Blodgett called the IPO "Muppet Bait" for how dangerous a proposition buying into Facebook was for retail investors. We all know what happened next. There were no buyers of the shares hitting public markets, and the stock instantly entered a tailspin dubbed the "Facebook Faceplant." Here the underwriters were accused of "botching" the IPO at the expense of retail investors.

Leading up to Twitter's IPO, the biggest question was "how could we avoid another Facebook?" (too many such links to pick one worth sharing). Twitter purposely wanted to temper enthusiasm and price its offering low enough to encourage long-term investors to buy shares. Sure enough, Twitter opened over 70% above the $26 offering price and the company similarly left boatloads of money on the table a la LinkedIn. In each subsequent tech IPO, the prior "victim" ended up reaping the rewards.

Across these three big IPOs, we have seen punditry complain about the underwriters, company insiders, and the exchanges, amongst others, without ever looking into the proverbial mirror.  The media whirlwind surrounding these events has created a narrative which permeates society. This narrative then influences the actors in the next scene to attempt to avoid the pitfalls of the prior narrative, only to fall victim to new problems seen one long cycle ago. Punditry continuously drives a vicious cycle of reactionary moves with commensurate media complaints and the same problems sadly repeat themselves over and again. All we have learned in all this is that the underwriters simply can't win a PR windfall with these IPOs (though they do make plenty of money), and punditry will inevitably find a villain and a victim to create a story at its leisure. 

Disclosure: No position in any of the stocks mentioned.

Links for Thought -- February 17th

The IPO of the Decade? My Valuation of Facebook (Musings on Markets) -- Aswath Damodaran, professor at finance at NYU, takes his stab at constructing a valuation analysis on Facebook.  This is an outstanding post for anyone who has an interest in the Facebook IPO, and even better for those who want to learn the "how to" of valuation analysis from an outstanding teacher.

Memo to Lyle LaMothe: The Die is Cast (The Reformed Broker) -- Josh Brown offers some strong points on why the Registered Investment Advisor (RIA) platform is gaining momentum at the expense of the traditional wirehouse brokers.  Great read on the state of the investment industry today.

Kodak: A Parable of American Competitiveness (Harvard Business School) -- Very interesting analysis of Kodak's decline as a company and what lessons can be drawn for America at large.  A key point is the idea that outsourcing manufacturing resulted in the outsourcing of the means through which people derive innovation.

Allan Mecham: The 400% Man (Frankly Speaking) -- Frank Voisin takes a look at the recent SmartMoney profile on an under-the-radar investor from Utah who has earned a 400% return for his investors over the past 12 years.  Embedded in this post is an interview with Mecham conducted by the Manual of Ideas in 2010 which is a must read on how to become a successful investor (clue: one must think differently than the herd).

Lasry Sees Europe Bankruptcy Bonanza as Bad Debts Obscure Good Assets (Bloomberg) -- This article is as much an expression of Marc Lasry's belief that there are good values to be bought in Europe, as it is a mini-biography on one of my favorites in the investment business.  Lasry is a Moroccan immigrant, who studied hard to become a lawyer and then a successful investor.  A lot can be learned from this man, both as a person and a fund manager.

What Does Declining Gasoline Consumption Mean (Ritholtz) -- With oil prices on the rise yet again, James Bianco bring to light an important fact.  Gasoline consumption in America has been falling since 2007, and recently accelerated the pace of the decline.  What does this mean?  Go ahead and read the link to find out what Bianco thinks.

The Information: A Book Review Meets the Facebook vs. Google Debate

In The Information: A History, A Theory, a Flood, James Gleick traces the history of information from Claude Shannon working in Bell Labs through the modern day proliferation of information on the World Wide Web.  Not long ago, former Google CEO Eric Schmidt controversially proclaimed something along the lines of: “every two days we create as much information as we did in the history of the world up until 2003.”  While not necessarily controversial on its face, many perceived this as a slight on the accumulated knowledge of mankind up until that point. 

What Schmidt meant by was not to diminish the accomplishments of his ancestors, but to laude the proliferation and compounding power on which information works.  Information over time itself becomes a facilitator of faster and swifter growth in new information.  Gleick’s book provides us all with the framework through which to understand what Eric Schmidt meant and why it is consequential and important. 

Few would deny that today is the Information Age, and as such, any author who titles his book “The Information” is undertaking a self-acknowledged daunting and maybe impossible task.  As humans, it is perhaps our ability to create and manipulate information (and not our opposable thumbs) that distinguishes us from the rest of the Animal Kingdom, and that certainly factors into the intrigue and import of this book. 

By and large, despite its length and depth, the book reads like a novel with robust character development and seamlessly interwoven and entertaining narratives.  In reading The Information we learn about how the telegraph, telephone and Internet each came to vastly accelerate both academic and economic growth in due to the efficiencies gained from packaging information in novel ways.  We learn about the history of “coding” from African mountain-top drum beats, to World War II era code-breakers to web page development and the quantities and depth of information required to transmit each message across their respective medium.  And we learn about how today, as the Information Age just may more aptly be labeled the age of Information-overload.

The book is a multi-disciplinary take covering information from fields including physics, engineering, statistics, biology, English, and history, all at different points.  Through this vast lens, people from any background can extract significant value from reading this book.  In order to understand modern times, and how and why things work as they do, we need to take a step back and attempt to understand yesterday first.  Why this would be important to a computer programmer or entrepreneur is self-evident.  Its import to investors should be equally so.  We need to have a framework through which to understand the evolution of information-based services in order to understand what may be a value-trap and what may be the next big thing.

As I was reading the book, I couldn’t help but decipher in my head how it relates to today’s debate about whether Facebook is the next Google.  While reading The Information, I came to thinking that many miss what I perceive to be a key point: one of the most essential elements of Google is that it is THE catalogue of information for the Internet.  Google’s dominant position as the search engine of choice and its first-mover advantage in building out its own information storage infrastructure has helped cement that status.  Facebook may (and does) have an advantage as it pertains to social connections, yet Google’s advantage is far more robust and deeper. 

Google’s advantage is “information” in the most general and abstract sense.  The company figured out not only how best to store said information, but also learned how to catalogue and index the information in the most accessible manner.  Social is but one facet of information and it will never be more than that.  While just about anyone with an interest in information can extract value from Google, that’s distinctly not the case with Facebook.  Quite simply Google holds the keys to the information that the Internet facilitates.  Information is ubiquitous, and Google is your catalyst.

This is far from my complete analysis of the Facebook vs. Google debate (which I really think is an illusory debate founded solely on the premise that everyone likes an either/or proposition these days), but I think it is particularly relevant given the history outlined by Gleick in The Information.  I would recommend this book to just about anyone interested in learning about how the Internet came to be, for without information theory there is no Internet, but in particular, I would recommend it to anyone involved in either the development of new information-based services or any investors in media or technology companies. 

Author Disclosure: Long GOOG