Facebook IPO: Wall Street Sells Another Illusion

By DJ Pangburn, Death and Taxes

01 February 12

ne of the rather little known stories of World War II, situated within the even lesser known spy campaigns in North and South America, involves J. Edgar Hoover and spymaster William Stephenson, the man who served as one of the real life analogues of James Bond. Stephenson, as chief of the British Security Coordination (BSC) in New York City, was tasked with ensuring that if the UK was overrun by the Nazis, that the Crown could effectively run a resistance campaign from the American shores.

Stephenson's organization ran extensive media and propaganda efforts within the U.S., Canada and South America in attempt to convince the Western hemisphere that the fight against Hitler & Co was of prime importance. Naturally, the British spymaster had to interface with FBI Chief Hoover, who was not at all pleased that Stephenson was operating on domestic soil.

To mollify Hoover, Stephenson brought Hoover to Camp X near Lake Ontario, a base of operations where the OSS (forerunner of the CIA), Britian's covert resistance organization Special Operations Executive (SEO), and the FBI were trained to engage in paramilitary operations behind enemy lines. When Stephenson and Hoover arrived at Camp X, Hoover was told to look out across Lake Ontario, where he saw what he believed were several warships. In reality, those warships were created by a magician named Jasper Maskelyne using multiple mirrors and a toy battleship. Hoover didn't see what was actually there, but what his mind expected to see.

Like Maskelyne and a legion of other magicians, Wall Street very often excels at the art of illusion, especially when it comes to the IPO (Initial Public Offering)—and so it shall be with Facebook.

We have been told by various inside sources and financial experts (since Facebook is still a private company) that the coming Facebook IPO will supposedly value the company somewhere in the vicinity of $75 billion to $100 billion. All of this, of course, for a company that connects people on a very superficial level and profits on the collection and sale of user data.

Perhaps Facebook is worth at least as much as its 2011 revenues suggest, which were $4.27 billion, a figure which was double 2010′s revenues of $2 billion. And perhaps there is room for growth within that revenue stream as Facebook rolls out its Timeline interface and becomes more and more efficient at invasively gathering user data.

However, does anyone outside of the dream factories of Wall Street and Silicon Valley seriously believe that Facebook should be valued at $75 billion on the low end and $100 billion on the high end? As I noted in early 2011, all of this smells exactly like another tech bubble to replace the burst housing bubble. The Great Facebook Bubble‘s inflation is absurd. Wall Street banks and investors, as well as Facebook's numerous stockholders—many of whom are looking to cash out their stocks with the IPO—stand to benefit if they can create the illusion that Facebook is actually worth $100 billion.

The goal is to spread the belief in the illusion such that the valuation reaches its apogee, then falls over time (as all stocks do), by which point the wise investors will have already laughed all the way to the bank. As initial investors that is their right, of course, but it doesn't mean they didn't create and sell an illusion in the process.

Facebook CEO Mark Zuckerberg has stated over and over again that he wants control of the company in the long-term, and if that holds true, he will have to ride the IPO's high to a more sane stock valuation in the future. Zuckerberg has also claimed that money matters little to him; that may be so, but employees and investors who bought in early (like Goldman Sachs and even the Winklevii) want to get paid with the IPO. Thus Zuckerberg might not benefit immensely from the sale of an illusion (since he won't be dumping all his stock), but plenty of investors will.

Whatever happens with the IPO, it will be interesting to watch the coming magic show and witness the ever-evolving data mining methods devised by Facebook to please their new investors.