By Jeffrey Goldfarb The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Give Facebook the tiara. The social network may be worth more than $100 billion on its debut. As a result, the art of valuing Facebook has officially entered what economist John Maynard Keynes called the “beauty contest” realm. In justifying such a lofty number, Facebook’s supporters are resorting to increasingly wacky rationalizations, from the old chestnut monetization of eyeballs to comparing the company to credit scorers. But Facebook’s value, like beauty, is merely in the eyes of the beholder.

There is, of course, a lot to like about Mark Zuckerberg’s company. It’s not every day a new stock comes available sporting a business with some 900 million customers and an operating profit margin approaching 50 percent. And yet the latest potential IPO valuation of as much as $104 billion, achieved after it raised the maximum price from $35 to $38 a share, is difficult to defend using any fundamental analysis.

The investment community is bending over backwards to reverse engineer an answer. They run the gamut, from assumptions about Facebook’s ability to disrupt the traditional advertising market; comparisons to payment systems like Visa and PayPal; extrapolations from Google, Amazon and other internet firms; to the promise of digital goods.

Among the more creative methodologies, Evercore Partners presented a “marketing funnel,” its conical illustration of how Facebook will “demystify brand advertising” for marketers and others to support its projected valuation of up to $160 billion. And Sanford C. Bernstein analysts attempt to quantify the possible upside for Facebook by contemplating how its booty of consumer information may argue for a valuation in line with credit bureaus like Experian and Transunion.

In the end, it’s impossible to accurately gauge Facebook’s ability to reap profits from its successful social engine. And so investors are pricing its shares not on future income projections but rather on the basis they think everyone else sees great things for the company. In the “General Theory,” Keynes likened the scenario to a newspaper competition requiring readers to pick the prettiest faces from a series of pictures, with a prize for choosing the one that corresponds to the average preference. Sometimes capitalism is no thing of beauty.

By Jeffrey Goldfarb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

If checklists can save lives, surely they can help shareholders. The scandals at Yahoo, Green Mountain Coffee, Chesapeake Energy and other U.S. companies suggest boards of directors could do with some simple reminders to prevent them from making stupid mistakes. Breakingviews has drawn up a starter set.

The pressure on companies to find competent leadership has grown in tandem with their complexity. And in their quest for chief executives and directors who can deliver on a range of diversified financial and strategic initiatives, the basics are too often being forgotten and leading to avoidable failings. Just as surgeon Atul Gawande showed, in his recent bestseller “The Checklist Manifesto,” how a 90-second checklist reduced deaths in the complicated world of intensive care, boards could preserve shareholder value with a Post-it note of sorts.

College, degree, work history and military service confirmed? At Yahoo, a straightforward bit of due diligence, like the kind conducted by activist investor Dan Loeb, would have uncovered Chief Executive Scott Thompson’s misrepresented scholastic credentials.

Doing any moonlighting we should know about? Among his many undisclosed and still-unexplained activities, Chesapeake boss Aubrey McClendon was running a hedge fund on the side.

Do you have a close personal relationship with any of the senior management here? The designated stewards of Rupert Murdoch’s media empire are limited in their ability to restrain the mogul and his whims. But having the godfather to one of his grandchildren – whose father is also a director – officially designated as an independent should be a stark reminder to others.

By Jeffrey Goldfarb The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Sirius XM sold its soul and could pay a hefty price to retrieve it. When the U.S. satellite radio service stared down bankruptcy in 2009, it beat a rescue path to John Malone’s door at Liberty Media. For a financial lifeline, Sirius pledged a 40 percent stake and power over most big decisions to the wily cable magnate. But now he has come to collect.

Malone’s method looks unseemly. After a three-year standstill provision expired last month, he asked the Federal Communications Commission for its blessing to be custodian of Sirius with only a minority stake. That would help lay the groundwork for Liberty to take control without paying a premium to the rest of its shareholders.

Sirius is, broadly speaking, in a weak negotiating position. With its shares trading at about 10 cents apiece three years ago, the company agreed to borrow money from Liberty at 15 percent. It also sold Malone preferred shares for a pittance that convert into 40 percent of Sirius and confer final say-so over any significant deal, stock issuance and other major moves.

Things still turned out well. Revenue at Sirius has increased by about 20 percent to $3 billion, the company is now in the black and the stock trades around $2.25. Malone’s stake, once converted, would be worth some $6 billion.

He almost certainly wants more, however. Nearly $8 billion of net operating losses at Sirius would be useful to Liberty but may not be transferable and are probably too costly to access anyway. But Liberty can block any strategic initiatives Sirius boss Mel Karmazin and his board may want to make, so Malone could press them into another of his fiendishly complex deals.

It would start with Liberty increasing its stake in Sirius to over half, spinning off a new entity created with the Sirius stake and another Liberty-owned operation and then ending with Sirius buying that company with newly issued shares. The advantage of this so-called reverse Morris Trust transaction is that it would be tax-free for Liberty, giving it the most bang for its highly profitable Sirius investment.

By Jeffrey Goldfarb The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Warren Buffett seems to have learned something from a fellow corporate titan. The 81-year-old investing icon disclosed on Tuesday he was diagnosed with early-stage prostate cancer last week and pledged to keep shareholders updated about his health. The candor is a refreshing contrast to the way in which Steve Jobs guarded details of the illness that eventually killed him. Unfortunately, Buffett is shrouding his succession plan in the same sort of mystery the Apple boss did.

The prognosis sounds good for the Oracle of Omaha. Doctors have told him his life isn’t in any danger from the cancer, which isn’t an uncommon form for men his age, and that it hasn’t spread to other parts of his body. He plans to keep running Berkshire Hathaway as he undergoes two months of radiation treatment over the summer. The cheeseburger- and root beer float-loving Buffett doesn’t expect any further changes in his condition for a good long while.

Jobs, though younger, confronted a more insidious disease. Yet in the years following the diagnosis, he was reluctant to keep shareholders informed much about his treatment – or, as it turned out, the lack thereof. Jobs’ biographer wrote that for months he refused surgery for his pancreatic cancer – and came to regret it. Apple insisted his health was a private matter. It may well have been, but Jobs’ gaunt appearance fuelled endless media and market speculation, as did substitute appearances at conferences by his lieutenants.

Unfortunately, Buffett’s candour doesn’t extend to identifying his replacement. He said rather bizarrely a couple months ago that he knows who it is but the chosen one doesn’t. That leaves open the possibility the individual may not want the job managing the $200 billion conglomerate, a task even Buffett and his partner Charlie Munger have struggled with in recent years. And given that a man once on the shortlist, David Sokol, left amid a scandal last year, shareholders shouldn’t necessarily put full faith in Buffett’s selection skills.

Buffett expects to stick around for a while. Here’s hoping it’s long enough to realize he should reveal who will step into his big shoes.

By Jeffrey Goldfarb The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Andre Esteves is testing just how badly investors want a piece of his hot, Brazilian investment bank. The billionaire boss of BTG Pactual showed no signs of retreating from an initial public offering in the coming weeks despite a 350,000-euro fine against him by Italy’s financial watchdog for insider trading. The risks are looking big for this high-flyer.

Pactual’s allure owes much to Esteves’ dealmaking reputation. He sold his boutique to UBS at the top of the market and then bought it back a couple of years later in 2009 for a knockdown price when the Swiss bank ran into trouble. Since then, Esteves has attracted funds from a who’s who of global investors, including the Rothschild and Agnelli families, while retaining almost a quarter of the bank for himself. In the past three years Pactual’s value has increased six-fold to some $15 billion.

But that sparkling reputation just took a serious hit. Italian watchdog Consob accused Esteves of using privileged information when he bought shares of a local company in November 2007. The regulator has barred Esteves from holding senior corporate and board positions in Italy for six months and ordered some of his assets seized.

Pactual shrugged off the case and said Esteves was determined to appeal. Even so, a similar situation in Britain is quite revealing about the attitudes in Brazil. Ian Hannam, one of London’s most prominent bankers, resigned his role as chairman of capital markets at JPMorgan to fight a UK Financial Services Authority fine for alleged market abuse.

Esteves’ lieutenants come with their own reputational baggage, too. Huw Jenkins was in charge of the investment bank at UBS when it blew up in 2007. Roger Jenkins, another member of Pactual’s management team, spent years arranging aggressive tax structures for clients of Barclays, a business facing scrutiny in court in a case brought by the U.S. Internal Revenue Service.

But Pactual’s growth is tantalizing. In the five years to the end of 2011, its return on equity has averaged an eye-watering 41.5 percent, according to the IPO prospectus. That puts would-be investors in the position of deciding whether greed is enough to overwhelm any fears about putting their fortunes in the hands of a controlling shareholder embroiled in a trading scandal. Pactual may prove too hard to resist.

 By Jeffrey Goldfarb

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Oaktree Capital’s initial public offering was marked to Howard Marks. In the run-up to Wednesday night’s share sale, the outspoken co-founder of the debt-focused private equity firm made clear that accumulating assets would never be his top priority. Public investors, who have been conditioned to prize management fees from investment firms like Oaktree that have gone public, took the message to heart.

Underwriters, led by Goldman Sachs and Morgan Stanley, could only unload about four out of five Oaktree shares on offer. They sold at the bottom end of the firm’s price range. And then the market whacked them another 5 percent when trading started. That may reflect the Los Angeles-based firm’s guiding philosophy that clients, not shareholders, come first.

This was clearly spelled out in the deal’s prospectus as Oaktree’s first risk factor, among some 40 pages of them. Marks and co-founder Bruce Karsh stated unequivocally that Oaktree might not always think bigger is better. In 2001-02, they returned $5 billion to investors in their distressed debt funds. The warning wasn’t merely historical or boilerplate. Oaktree’s assets under management declined 9 percent last year, to $75 billion.

The problem with the firm’s promise to prioritize performance over scale is that it hasn’t delivered on that front lately. Though Oaktree is generally considered one of the best in the business, distributable earnings fell 23 percent last year. And returns in four of its last five distressed debt funds started before 2011 have underperformed its own long-term aggregate of 22.9 percent.

That still may have been less of a concern than Oaktree’s lack of size ambition. After Blackstone floated at the top of the cycle in mid-2007, its publicly traded units tanked during the financial crisis. That led to a revised private equity valuation pitch favoring the industry’s captive and steady fees over lumpier investment profits, or the so-called “carried interest.”

By Jeffrey Goldfarb The author is a Reuters Breakingviews columnist. The opinions expressed are his own.Carl Icahn gave Breakingviews a first-hand window into his methods. A recent column published about the 76-year-old activist investor irked him. His reaction echoed the tactics he has been using with corporate boards for decades. The experience makes it easier now to empathize with the American billionaire’s targets, but like some of those on the receiving end of his agitation, it also revealed a somewhat surprising alignment of interests.

At the outset, Icahn’s approach felt hostile, but it was by no means unsolicited. A Breakingviews columnist had telephoned Icahn to give him an opportunity to respond to a view that his future activist campaigns might be weakened because of a court examiner’s damaging findings at Dynegy, an energy group where Icahn also had meddled. Though Icahn tried to reach Breakingviews before publication, his messages were not received until later because of technical and human errors on our end.

Understandably, Icahn was irritated. When he finally got through to a Breakingviews editor, however, his arguments crossed over to the outlandish. These included a claim that the column was written by a paid operative of CVR Energy, another company he’s trying to buy and which featured in the column. Some of it sounded intimidating, akin to Icahn’s approach with Time Warner in 2005, and as he so often addresses management and boards he finds complacent or incompetent.

An inflammatory letter that followed from Icahn – another page out of his activist playbook – set the Breakingviews editorial team in motion to respond to the billionaire. His retort was discussed, edited, renegotiated with Icahn and then slotted to appear as a “Letter to the Editor” in an upcoming edition of Breakingviews.

But shortly after agreeing to the epistle’s contents, Icahn withdrew. The reversal was evocative of his fickle logic over a Lions Gate merger with MGM, back in 2010 when he was trying to buy the studio responsible for “Mad Men” and “The Hunger Games.” And then, in what seemed like the journalistic equivalent of greenmail – yet another familiar gambit for a sly, old raider – he offered an on-the-record interview in exchange.

Though the Letter to the Editor did not run, Icahn pressed ahead with embroiling Breakingviews in his fight at CVR anyway. He issued a revised version of the letter that had passed between us to investors of CVR – including some of our edits gratis and only thinly veiling the inspiration for his arguments in the first place. In a familiar “bear hug” form of activism, Icahn effectively bypassed Breakingviews management and took his case directly to shareholders.

His decision to relocate the fight ultimately backfired. The commentary “written by a major media organization,” Icahn said, was “fraught with inflammatory rhetoric,” as he tried to persuade CVR investors to tender their shares into his fiendishly complex takeover bid. The targeted company from Sugar Land, Texas, used the moment as an opportunity to draw attention to the Breakingviews column, by name, and the absurdity of Icahn’s notion that it had planted the story.

By Jeffrey Goldfarb The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The dystopian kill-or-be-killed world of “The Hunger Games” isn’t the film’s only apt metaphor for Wall Street. This weekend’s smash box-office debut of the teen lit sensation makes Lions Gate the studio equivalent of a boutique investment bank landing the year’s biggest deal. And Walt Disney’s coinciding flop “John Carter” raises questions about Hollywood’s bulge bracket. Independents from both industries are fighting to stay in the spotlight.   Lions Gate is deservedly the talk of the town. In the first few days of its release, “The Hunger Games” delivered $155 million of U.S. and Canadian ticket sales. That makes it the biggest non-sequel opener ever, and leaves it third behind only later chapters in the “Harry Potter” and “Batman” series. It’s a coup for a relative tiddler, especially when a goliath rival announces a $200 million loss on an epic fail even by Tinseltown’s larger-than-life standards, as Disney just did for its own fantastical book adaptation.   What’s more, in a banker’s terms, “The Hunger Games” is like having an acquisition-hungry client with an abundance of capital available. Lions Gate plans to release three sequels based on the Suzanne Collins trilogy of bestsellers, so it’s a gift that should keep on giving.   But competing against rivals owned by deep-pocketed conglomerates is as hard on the West Coast as it is on the East. Even with the lucre raked in so far from “The Hunger Games,” Lions Gate won’t crack the top five in the studio league tables, according to Box Office Mojo figures. Legendary moguls Harvey and Bob Weinstein have struggled similarly, producing a steady slate of critical successes via their eponymous indie house – including this year’s Oscar winner “The Artist” – that often fail to achieve blockbuster status financially.   Smaller shops on Wall Street have capitalized on the misfortunes of their larger peers. Greenhill, for example, is valued at over 16 times expected 2013 earnings, according to Thomson Reuters data. And despite losing money over the last few years, Lions Gate trades at a forward multiple of 15.   After spurning the advances of activist Carl Icahn last year at about half the current share price, Lions Gate spent over $400 million to buy “Twilight” producer Summit. That gives it the ability to release more films, on a par with the likes of Paramount. That’s important in a business that feeds on big hits. Just as banking supermarkets can no longer ignore the boutiques nipping at their heels, “The Hunger Games” means Hollywood must pay heed to the Lions Gate mouse that roared.

By Jeffrey Goldfarb The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Vivendi’s Universal Music feels good. The purveyor of Lady Gaga hits is so confident of getting approval to buy rival EMI that it agreed to pay the full $1.9 billion price even if the transaction is blocked by trustbusters. But beyond outright success or failure, another possibility – being forced to sell various pieces – could prove costliest.

The regulatory environment has shifted since the deal was announced last November. AT&T was forced to pay a $4 billion break fee after the U.S. Justice Department sued to stop its $39 billion acquisition of T-Mobile USA. The European Commission shot down Deutsche Boerse’s merger with NYSE Euronext. And the Federal Trade Commission, which is reviewing the music combo, stepped in to stop a pharmacy services deal earlier this year.

With a combined 40 percent U.S. market share and even more in some big European countries, Universal must be persuasive. For starters, it needs regulators to believe Apple’s “power buyer” status will prevent Universal-EMI from having undue sway over the cost of digital downloads. That could be a tough sell given prices of the most popular tracks went up during the downturn.

Even assuming antitrust authorities allow the industry to shrink from four majors to three, they could force the Vivendi unit to sell pieces to restrict its dominance. Suppose it needs to offload labels accounting for 15 percent of the $260 million of EBITDA it’s paying seven times to acquire. Selling these bits at a multiple of five times would cost Universal nearly $100 million.

Moreover, those overlaps could account for up to 25 percent of the $160 million of annualized synergies Universal forecasts. On the same acquisition multiple of seven times EBITDA, that would lop another $280 million off the deal’s value. All told, these concessions could cost almost $400 million.

If blocked, EMI and its catalog of classics by the Beatles and others would revert to Citigroup, which would then run a second auction. In that scenario, Universal eats the gap between the $1.9 billion it paid and any lower price fetched. Last time the closest bidder was Warner Music at about $1.65 billion. If Universal’s regulatory calculus isn’t right, the math might yet have it changing its tune.

By Jeffrey Goldfarb The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The New York Times Co’s pay structure isn’t fit to print. The venerable U.S. newspaper group revealed a bonus structure that rewards bosses with 175 percent of their target payouts for achieving a mere 2.5 percent return on invested capital. That’s a fraction of the company’s cost of funds, and much lower than its own previous standard. A high bar for journalists doesn’t seem to extend to management.

The latest compensation generosity was quietly disclosed on Friday, showing a keen awareness of the news cycle. The company also had the nearly $24 million pay package of departing Chief Executive Janet Robinson as headline bait. But its long-term performance plan tells another part of the story.

Top executives stood to make their full target bonuses – $2 million each for Robinson and Chairman Arthur Sulzberger – if the business delivered a tiny 1.6 percent return on invested capital and a middling 7.7 percent operating cash flow margin on average for 2009 to 2011. They were due up to another 75 percent because the actual return was above 2.5 percent and the cash flow margin topped 9.8 percent.

Rival Gannett reported much higher cash flow margins in 2009 and 2010, but the USA Today publisher was still rightly called out by David Carr, the Times newspaper’s media reporter, for overpaying executives. And putting the return-on-capital hurdle in context, the Gray Lady’s parent company paid a whopping 14 percent interest rate to borrow money from billionaire Carlos Slim in 2009 and about 6.6 percent on bonds sold in 2010.

That suggests the Times Co rewards performance that destroys value. It’s notable that executives couldn’t live up to more rigorous expectations set in previous years. In 2009, full payout of bonuses required a three-year average return on invested capital of 7.3 percent, over four times the hurdle in the just-disclosed plan. Back then, Sulzberger and his colleagues got zip on that metric. But they still received healthy bonuses after a 70 percent collapse in the company’s shares over four years – partly because rivals fared even worse.

When he picked apart Gannett’s pay practices, Carr wondered: “How in the world could a board, any board, justify such huge payouts to media executives at a time like this?” It’s a question the occupants of his employer’s boardroom might want to ponder.