Facebook IPO Will Boost 1%, But the Rest of Us Won't Be Sharing
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But skeptics say that FB is likely to have an overvalued IPO. There are concerns that the company’s growth will prove difficult, maybe impossible, to sustain. Can FB monetize users as effectively as Google? What will happen if the company fails to add new users or keep existing users engaged? How can FB be sure its platform will get along with mobile devices whose operating systems it can’t control? How will it compete with China’s already-established local platforms?
And, um, what exactly is the business model? The difficulty of answering that last question is a good sign that we may have a bubblicious situation. Zuckerberg likes to talk about how his company is different, how it wasn’t built to be a company, how it’s all about a new way of sharing, etc. etc. We’ve heard this before – from Google, whose practices are now under increasing challenge as abusive and monopolistic. Are Zuckerberg’s noises the sound of a visionary? Or a bubble inflator?
A big concern is that Zuckerberg will retain unusual control of the company after the IPO. If he makes a bad call, the company’s value could tank. Which will not suck for Zuckerberg, who will be quite rich no matter what happens, but will possibly suck a lot for shareholders. Which brings us to another question. Does he owe anything to the rest of us?
Sharing the Wealth
Companies are often run by powerful CEOs, but they are usually owned by shareholders and governed by a board of directors meant to look out for shareholder interests. At least that’s how it’s supposed to work. But FB will be doing things differently. After the IPO, Zuckerberg will keep control of the company in two ways. First, he has set up two classes of stock, one of which (Class B) has ten times the voting rights of the other (Class A). Guess which kind Zuckerberg has? That’s right. His stock is Class B. This practice is pretty common. But Zuckerberg has done something less common in setting up voting agreements that give him final control of the company. (For details, see article by the WSJ’s Ronald Barusch.). Bottom line: Zuckerberg will be calling the shots. And no one can replace him with different management. In all US companies, the notion that public shareholders can influence corporate decision-making is typically a sham. But with FB, from the outset Zuckerberg has ensured that, as CEO, he will be accountable to no one.
Slate’s Matt Yglesias sees this as a new form of corporate dictatorship. As he put it:
“To purchase a share in Facebook is to bet that at some future point some future person will want to take it off your hands for more money. You’re not getting even a notional slice of control in the company. There are no limits on the CEO’s ability to channel Facebook’s profits directly into his own pocket rather than yours. There’s not even a cheap-talk promise that he’s going to try to maximize the value of your investment. He created the company, he controls the company, he will always control the company, and he’s graciously allowing you to turn some of your working capital over to him.”
After the IPO, Zuckerberg will be one of the world’s richest people, at least on paper. Well, hasn’t he earned it?
Not so fast, says economist William Lazonick, an expert on the history of American business. Like Elizabeth Warren, Lazonick reminds us that CEOs like Zuckerberg don’t create companies in a vacuum. They had a lot of help along the way. “Facebook exists because of decades of US government investment in computing and the Internet plus the work of hundreds of thousands of people to develop the underlying technologies,” says Lazonick. “Yet because Facebook is positioned with its particular popular application, Zuckerberg and his partners grab all of the returns. This inequity could be partially remedied by high taxes on the capital gains of Facebook's shareholders that could be used to fund the next round of innovation, including the funding of higher education. Rather, of course, the taxes on these gains have been cut to 15%.”
Lazonick reminds us that this problem dates back to ‘80s when the IPOs of two young companies, Apple and Genentech, netted their founders and venture capitalists ginormous fortunes. And you will not be surprised to learn who it was that lobbied to lower the capital gains tax rate. Lazonick explains that “as members of the National Venture Capital Association, which emanated from Silicon Valley (as did Apple and Genentech), it was these same venture capitalists who had successfully lobbied US Congress in the late 1970s to lower the capital gains tax rate, which was almost 40 percent in 1976. The IPOs that brought them these riches were only possible because of NASDAQ, founded in 1971 to provide national price quotes on highly speculative companies.” In the early ‘80s, high-tech entrepreneurs and venture capitalists raked in stunning amounts of money from IPOs. Corporate executives then caught the fever and demanded that their boards shovel over mounds of stock-based pay so that they could catch up with these new zillionaires.