Why Facebook won’t go public

By Felix Salmon
January 4, 2011
Miguel Helft explains why Facebook is going to have to go public sooner or later:

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Miguel Helft explains why Facebook is going to have to go public sooner or later:

Mr. Zuckerberg’s quest to keep Facebook private will not last forever. Federal regulations require companies with 500 or more investors to disclose their financial results, eliminating one of the principal advantages of staying private.

This is a classic non sequitur: Helft’s first sentence simply doesn’t follow from his second. Yes, it’s nice for companies not to have to disclose their financial results. But just because you’re disclosing your financial results doesn’t mean you have to go public. Indeed, there are many privately-held companies which issue bonds and therefore disclose financials, but which have no public shares outstanding.

Follow Helft’s link, and you arrive at Steven Davidoff explaining the conventional wisdom in a bit more detail:

The company can still stay private even if it is forced to begin reporting to the S.E.C. However, in the case of Google, which faced with a similar choice several years ago, it chose to go public. Google decided that if it was going to have to release its nonpublic financial and other information to the S.E.C. and the public, it might as well get its bang for the buck and do it in connection with an I.P.O. Though not required to do so, Facebook would probably come to the same conclusion if the S.E.C. brings this reporting requirement to a head.

The problem is that I’m having a lot of difficulty working out what kind of “bang for the buck” Facebook would get from going public. Indeed, it seems to me that for Mark Zuckerberg, the downside of being public outweighs the upside, whether or not Facebook is reporting its financials to the SEC.

The main thing to remember here is that Zuckerberg is the CEO, he’s always wanted to be the CEO, and he has zero intention of relinquishing that job. He’s not like Larry Page and Sergei Brin, who are happy being founders and letting Eric Schmidt do the less pleasant things associated with being CEO: this is Zuckerberg’s company, and he’s going to run it.

The problem is it’s been hard enough for Zuckerberg to grow into being CEO of a private company: he’s certainly gone through quite a few executives along the way. The job of being CEO of a public company is very different, and much more outward-facing. For one thing, it involves lots of interaction with journalists and analysts. More invidiously, it involves being judged by share-price performance to the exclusion of almost everything else. Public shareholders have the right to demand that the CEO do his utmost to increase the value of their holdings from quarter to quarter and from year to year; it’s easy to see why Zuckerberg has no interest in bringing upon himself that kind of pressure.

It’s easy to see Zuckerberg being attracted to the idea of living like, say, Mike Bloomberg, running a multi-billion-dollar company exactly how he wants, without constantly being second-guessed. And remembering too the cautionary tale of Apple, where the founder, Steve Jobs, was forced out by angry shareholders when the stock failed to perform.

Of course, Zuckerberg does have shareholders right now, but he reports only to a very small board of directors comprising himself, Marc Andreessen, Jim Breyer, Don Graham, and Peter Thiel. Those are not the kind of people to care much about complaints from people who bought at a high valuation that they’re having difficulty selling their stake at a profit.

If Facebook remains situated at one remove from the harsh scrutiny of public markets, then, it’s likely to be able to follow its own path much more easily, without having enormous pressure to justify its $50 billion valuation with massive growth in revenues and profits. That’s probably attractive not only to Zuckerberg, but also to much of his executive team, and even to the board, none of whom to be in any hurry to exit their positions.

So why go public at all? The main reason for an IPO is to raise money, but Facebook has just demonstrated, in its deal with Goldman Sachs, that it’s more than capable of raising as much money as it needs privately. Any time Zuckerberg needs new equity capital, Goldman can find it for him at a very attractive valuation, no IPO required. And if Facebook is now profitable, it probably doesn’t need any more equity capital anyway.

The secondary reason for an IPO is to provide a mechanism for shareholders and early investors to sell their stake in the company. Again, Goldman will happily perform that role, acting as a broker between Facebook insiders looking to sell and its own high-net-worth clients looking to buy. No public listing required.

The final main reason for a public listing is to give the company an acquisition currency—but even without a public listing, Facebook is more than capable of offering to buy other companies with its own stock. It’s very rare for a private company to have stock which is as liquid and as easily valued as Facebook’s—but now that Facebook has got there, it doesn’t really need to go any further.

There are other reasons to go public, but none of them are very convincing in the case of Facebook: the idea that a public listing gives a company a higher profile, for instance, or that it expands the pool of possible shareholders, thereby increasing its valuation.

So my feeling is that insofar as Goldman has just bought itself Facebook’s IPO mandate, it might have bought a unicorn. Not that Goldman would mind in the slightest if Facebook stays private—right now, it’s in the highly enviable position of having the exclusive ability to parcel out Facebook shares to its own clients, and to make money on pretty much every trade in Facebook shares. That, surely, is more valuable than any one-off IPO fee.

Update: A couple of other things I forgot I wanted to say. Firstly, public shareholders tend to be a litigious bunch. And secondly, there’s a real chance that the Goldman-brokered secondary market will fall, rather than rise, in value from $50 a share. And there’s no chance of an IPO below $50 per share in the foreseeable future.

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