Tuesday, May 22, 2012

The strategic consequences of the Facebook stock slide

Pre-Facebook IPO there was a lot of speculation about what would happen when Facebook went public.   As far as I know this is the first speculation of what could happen if the stock continues it's rapid decent toward a sane and reasonable valuation. 

First - we all know a lot of fb employees left other companies to go work for a pre-ipo company - expecting a big pop.  The problem with expectations is they ultimately feel like they're obligations.
It's no secret many fb employees have basically been planning their retirement, or at least elaborate sabbaticals for the past few years, because when you work in that type of culture it's inevitable.  Even if Zuck could keep the culture sane around the office, he can't control outside the office.   As a  FB employee - family and friends would ask you constantly about it - and regardless of what's happening at work - eventually those thoughts creep in at some level. Big decisions like "when to get propose", "when to get married', "when to make babies" start to revolve around expected IPO's.   And of course - let's not forget that socially awkward engineers working for highly anticipated pre-IPO companies often have an easier time obtaining hotter girlfriends.

Now the stock is sliding, options won't vest for a few months and underwriter Morgan Stanley  doesn't appear to be supporting the stock any more than contractually obligated, which clearly isn't enough.

If the stock continues it's decent .. it will absolutely decimate productivity, leaving Facebook a hollow shell of what it once was.   Since most options won't vest for a couple of months (6) and it creates a sort of perfect storm for fb -- and unless we see Zuck take action soon (this week?) then it's going to be ugly.   Here's what happens:
  1. The negative "what will the stock be worth when my options finally vest" consumes soooooo many clock cycles of engineers it's disgusting, productivity declines, ultimately deadlines slip, stress builds .. sleep is lost and all-night hack-a-thons become opportunities to produce horrible bug ridden products built on code you can't read the next morning.
  2. with "direct to production" live testing (which Facebook is known for employing) - it only takes one person off their game to screw up a project or cause a really bad release.  
  3. The loose management structure makes policing bad employees very difficult. 
  4. Even worse firing anybody right now (before options vest) and the fact their located in business hostile California means that fb is going to invest some of that newfound ipo treasure into new condo's located in "wrongful termination lawsuit city". 
  5. Plenty of attorneys will happily sue Facebook on contingency -- $100b market cap is a massive target. 
  6. Going to court to explain why somebody was fired stresses managers out and wastes productivity.  The facebook uniform: which consists of jeans, hoodie and a pair of brooks are NOT what should be worn to a courthouse.
  7. Employees who remain at FB end up pondering questions like: is my hot-girlfriend going to leave me now that I'm not *that* rich, can I support her lifestyle and still pay my student loans off, can I still afford to help my parents retire in style -- omg are my parents going to end up moving in with me when they're older [kill me now]??
Seeing facebook falter is probably energizing the competitors - if you think the Google+ engineers aren't cheering and burning the midnight oil right now .. now is their time to strike and I think they know it.

Facebook has gone public, it now has a whole new set of hurdles.  Google has already successfully navigated these treacherous waters. Google absolutely had a pre-IPO plan for G+, I'm curious what the post IPO plan is.
It's interesting because post IPO that's when a company is most vulnerable, they're off balance right now and that's when you want to put them on the ropes and beat the hell out of them.

And while minority shareholders may not have enough voting privileges to excise Zuck -- they absolutely have enough attorneys to keep him and the entire senior management team subpenaed in court [out of the office] for months on end.  The flat management structure and the fact that Zuck is "fb friends" with so many FB employees will almost guarantee he's personally named in every lawsuit. Obviously he can give back some treasure to make them go away, but of course they know how much Zuck loathes suits .. so those flesh eating piranhas will absolutely use that against him and drag it out.

So many minority investors -- most who never probably even reviewed the prospectus and didn't even realize that they own non-voting shares.   If the stock goes below $20 in the first month (which it easily could) we'll see a which-hunt that will rival no-other.  I suspect the papers are already being drawn up right now in anticipation. 

If the stock doesn't correct (and seriously how can it with the over-valuation it has) - expect Facebook to rapidly become a black hole of despair. .. eventually that will impact the product development, further creating a downward cycle.  

Zuck clearly had people looking out for him, they maximized the share price at IPO.  But there is a very clear [strategic] reason to let the stock "pop" post IPO -- it helps mitigate this exact sort of situation from happening.   It's why stock is supposed to have underwriters, but it seems like everybody either under-estimated how over-inflated this would be, or just didn't care.
Similar tales have been told before .. oh well, I hope he's enjoying planning his honeymoon.

1 comment:

Brian Horakh CEO Zoovy, Inc. said...