Why I'll Be Sitting Out the Facebook IPO

Wall Street bankers said Mark Zuckerberg wasn't going to show up in New York on Monday, the first leg of the "road show," or publicity campaign to make sure the company he founded in his dorm room, Facebook, is worth close to the estimated $100 billion he and his bankers are looking for when they issue stock to the public for the first time next week.

But there he was, clad in his trade mark hoodie, making his way into the Sheraton New York hotel in Manhattan for his much hyped pre-IPO investor meeting. Over the weekend, bankers told me that the Facebook founder was likely to skip the event for "security reasons." The Zuck, as we know, managed to man up, though when he arrived he was flanked by more security than any CEO I've ever seen.

He then got down to business, which for Zuck and his crew, including Facebook's chief operating officer Sheryl Sandberg, meant convincing the more than 500 top investors that they should spare no expense next week to buy shares of his company, which even though doesn't quite save the world or even offer something they can't do without, is really one of the greatest things ever invented because it allows people to connect with each other in ways never before thought possible.

Facebook is designed to make it easier for human beings to connect, share ideas and generally make the world a better place. Its known as "social media" and its supporters say it's revolutionary. An average of 845 million people flock to Facebook each month for the so-called
"Facebook experience" investors were told on Monday, and more people are joining this revolution every day.

All of which sounds grand, of course, until you begin to understand what the Facebook experience really is: This allegedly life-altering experience is a business model built largely on the notion that people have some primal need to connect with high school pals, share updates
about their eating habits, post cute photos of their dogs, and that somehow all of this will translate into massive profits for years to come.

Zuckerberg and his legions of fans will tell you I'm selling the Facebook experience and its business potential short; sharing photos with your Facebook "friends" is really something bigger than a passing fad, they tell me. Yes "friendship" in the Facebook sense helps make the world a better place because people can share experiences (and photos) with each other. But in doing so, these same people have been revealing things about themselves that can be distilled, quantified and used for selling stuff and making money.

Both the Zuck and his management team have only just begun to make Facebook into a real business, they say.

OK, I kind of get that, but that doesn't answer a fundamental question about a company that is asking investors to believe it's something bigger than a chat room with bells and whistles: Why do we need Facebook and is it worth a $100 billion valuation?

Zuckerberg certainly didn't answer that question at least directly during his Q and A with investors on Monday, though he did apparently say he that if he had to do it again, he would have no problem spending $1 billion on a company like Instagram, a photo sharing outfit, that he snapped up just a couple of weeks ago without input from the people that his bankers are calling "the adults in the room." That's his board of directors, comprised of some pretty smart business folks, like Netflix CEO Reed Hastings and Internet pioneer Marc Andreessen.

The adults however were blind-sided by the 27 year-old wiz kid Facebook founder with the purchase, but according to the Zuck, and the other adults he's brought to Monday's event, investors are supposed to cheer such exploits.

It's part of the "hacker culture" that rewards creativity (some would say recklessness) that Zuck and Sandberg want to remain as a staple of Facebook even as the company makes its first move into mainstream Corporate America. It sounds pretty cool being a hacker, but the feedback I received from Zuck's appearance on Monday can best be summed up by this comment from an investor who attended: "lame." As another investor told me "he didn't add that much about the company that we didn't know."

But is being lame at an investor meeting a reason not to buy stock next week, and miss out on what Wall Street is predicting as a massive post IPO price bounce?

Not necessarily. Most CEOs I know are lame before crowds, but I'll give you some others to consider before making a big bet on the Zuck and the company he created.

First, many of my friends and some pretty smart tech writers (check
out Henry Blodget's excellent profile of the Zuck in New York magazine) love the company because it is, for lack of a better word, cool. Zuck didn't create an environmentally devious outfit that fracks oil from the ground, but instead something designed to make our lives more open and democratic without hurting the environment.

He did this from his college dorm, along the way bested a couple of wanna-be Wall Street tycoons/jocks who tried to rip off his innovations, and then went on to defy skeptics to create something amazing.

There's even more alleged coolness: We are told that Zuckerberg's Facebook is so cool that it doesn't need Wall Street hype to sell itself and by virtue of the Zuck's hoodie appearance on Monday, he doesn't need PR handlers and image consultants to help him sell the utility of his product to even the most skeptical investors.

Well, not quite. In truth, Facebook is a company that's like most of the investment banks I cover. It demands complete, almost paranoid secrecy from anyone it deals with, and is obsessed with image. Since announcing plans to go public, Facebook officials have threatened underwriters, people at the major stock exchanges competing for the company's listing, and consultants with immediate termination if they break the code of silence.

It has hired a fairly prominent PR team, the Brunswick Group, which has already begun slinging mud and planting stories about its tech rivals like Google. In other words, Facebook is building its brand, at least in part by trying to tear down others.

OK, that happens all the time on Wall Street but it does run counter to Facebook's Silicon Valley, non Wall Street image, as does this: The guy handling the press at Brunswick, Erik Hotmire, knows his way around Washington and Wall Street more than Silicon Valley. He was a
key aide to Securities and Exchange Commission chairman Chris Cox -- yes that Chris Cox who appeared half asleep during most of the financial crisis. Before that he worked at a Washington lobby firm, and before that he worked as a spokesman for someone that a lot of Facebook's cool users would consider very uncool: former President George W. Bush.

Facebook's underwriters, meanwhile, are already in their farcical hype mode and will do anything to get the price of the deal as high as possible, which is perfectly fine, unless you run around as Facebook does telling people that it "will not sacrifice user interests for short term revenue or investor interest."

Maybe so, but Zuck finally agreed to attend Monday's roadshow because underwriters told him it would help sell shares and get that big $100 million valuation. Zuck initially wanted to sell most of the company's new stock to small investors, so-called retail investors, but most of it will now be handed to large institutions that are Facebook's Wall Street underwriters' best customers.

In fact, two of those underwriters, Morgan Stanley and JP Morgan have been fighting over who can do a better job at making the Zuck look like the next Thomas Edison, and Facebook the second coming of GE. Of course, it's hard to make a 27-year-old in flip flops look like Edison, but making Facebook something bigger than a chat room with dog photos is clearly the strategy of the Wall Street hypesters.

So far, JP Morgan has won this battle, largely thanks to the inventiveness of its hyper-ambitious banking chief, Jimmy Lee, who ordered up giant size Facebook posters in the entrance of the bank's midtown Manhattan headquarters.

OK, Facebook isn't Pets.com of the last internet bubble. But it does say something that the bank that best survived the financial crisis because of the steely resolve of its CEO Jamie Dimon -- one of the few on Wall Street who refused to wager outsize bets that took down competitors -- is willing to dilute the JP Morgan brand even for day for a company run by a kid in a hoodie.

One reason, of course is money. JP Morgan, like Morgan Stanley and Goldman Sachs are the senior underwriters of this deal but they are also fighting over the underwriting rights for the next big Facebook offering of stock. Though the fees are small, the size of Facebook's current offering and expected secondary deal will be big enough that lead underwriters will make a lot of money.

So stay tuned for the underwriters' upcoming research reports to supplant their "strong buy" recommendations with "Very Very Very Strong Buys" if they can get that past regulators.

I'm sure when the IPO sells next week, it will sell well; Facebook is a good company that has growing revenues and profits. It has, to say the least, an amazing brand, among the most recognizable one in the world, and Zuck deserves credit for all that.

But what makes you think someone else maybe smarter than the Zuck can't build a better Facebook? It has certainly happened before in the tech world, and it will happen again.

There are other problematic facts about the company straight its financial statements that should also give investors pause; revenue growth is beginning to decline, the mark of a maturing company, and profits are leveling off as well. Keep in mind, all this is happening while its CEO says he has no problem blowing a $1 billion on an internet photo outfit without consulting his board.

Maybe that's why listed under "risk factors" in JP Morgan's IPO sales document is the fact that Zuckerberg "has control over key decision making as a result of his control of a majority of (Facebook's) voting stock."

But forget all that and ask yourself this simple question if you're ready to make a real long-term investment in Facebook: Can I do without seeing a photo of my high school girl's friend's new pet poodle?

If you're like me, and you can, maybe you should sit this stock offering out.