Friday, February 03, 2012

A Facebook Footnote

What I offer here is no real secret but nobody else seems to be picking up on it so I guess it falls to me.

Specifically--we're hearing all this talk about how the Facebook IPO implies a company that is "worth" perhaps $100 billion.  But unless  miss something simple and vital, that number is a "market cap"--share price times market cap.

Yet everybody knows that market cap is a fantasy number. It implies (assumes) a flat demand curve--that each share will sell at the same price of all shares.

A moment's reflection should be enough to persuade the observer that this will be the case, if at all, only by accident.  Most of the time, the more shares offered, the lower the price. Sometimes (buyer trying to corner the market), the more shares purchased, the higher the price. Either way, the curve is non-flat.

So even if Facebook does go out at the anticipated numbers, it doesn't imply much of anything at all about the value of the company as a whole.

One group does gain from all the hubba hubba, though: those who hold shares already.  By conventional standards, the Facebook offer is  tiny--perhaps five percent of all shares.  Restricted demand plus unrestricted hype means the new issue is indeed likely to go out the door at  heart-stopping price--enriching nobody so much as those who already own shares who just have to stand by and bath in the warm spray of the market pop.

End of message. Just sayin'.  

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