My Perspective on Facebook's IPO

Over the last several weeks, several of my friends and colleagues have asked me what my thoughts were on Facebook’s announcement that they were going to file for an IPO with the SEC.

On the surface, I had the same thought.  Why would Facebook need access to additional capital when they seem to be generating enough working capital on their own through ad sales as well as the revenue from games on Facebook, like Zynga, who reportedly brings in close to a $1 billion in revenue a year, which Facebook gets approximately 30% of.

So I did some thinking, and analysis, and I think I have come up with what one of the main drivers is; the Securities and Exchange Commission (SEC).  Stick with me here, I will explain this, and not make this a lesson on corporate finance and capital markets.

So let me set the stage.  For firms in the US, most are permitted to sell stock in their company to private investors up to about 500 people, or entities.  After that, the SEC and state securities regulators usually require a firm to register as a public company.  Which is a costly and length process, and changes the dynamics, and the focus many argue, of the firm. 

Instead of innovating, the firm’s managers start to focus on stock price and market capitalization and being making decisions that support the financial knobs behind the scenes to keep those numbers in a favorable light.  This process is many times not in alignment of what the firm’s customers want to see, which creates the friction.

Now I take you back to January of 2011.  It was big news back then that investment firm Goldman Sachs created what’s known in corporate finance as a special purpose vehicle (SPV).  Essentially this “vehicle” allowed Goldman’s high-net worth customers to invest Facebook, more than 500 people or entities I am sure.  This, many speculate, allowed Facebook to circumvent the 500 person or entity rule set by the SEC.

Since this SPV was formed last year, the SEC has been evaluating corporate finance rules and equity instruments like SPVs.  Many on Wall Street speculate that the SEC is preparing a statement that would require Facebook to disclose their investors and detailed financial statements and essentially register as a public company with the SEC.  So, if that is the case, then why not file for an IPO, one that some say is relatively low in terms of valuation, and go through the process formally.  This puts a positive spin on a somewhat contentious issue as it relates to the SPV and Facebook’s attempt that potentially circumnavigate SEC rules.

There are many other reasons to file the IPO that are far too complex to cover in this blog post, but at the end of the day, it is going to make a lot of institutions and investors very wealthy, including Mark Zuckerberg himself,, who is estimated to own about 25% of the company.

My biggest fear is that this process is going to be very distracting to Facebook executives as well as the employees.  Needless to say, since Facebook is a startup, there are several employees who will profit handsomely from an IPO as well.

I have seen many cases where a firm goes public and it takes its collective eye off the ball; it stops doing the things that got it to the point of where it was pre-ipo.  Once a firm goes public, you have a lot less autonomy as an executive team in terms of running the company.  You know have investors and Wall Street to answer to.  You now have to report your numbers on a quarterly basis, and spend a lot of time talking with Wall Street analysts so that your firm is positioned well on the street and the analysts understand what you marketing strategies are and what the plan for continued revenue growth is.

Needless to say, it looks like Facebook will be going public sometime in the May 2012 time frame.  Most of us will only somewhat profit from this event since we are invested in our 401(k) or SEP IRA plans.  At the end of the day I hope that Facebook can stay the course and continue doing the things they have done to get them to this point.  It will be an interesting ride to watch over the next several years.

Now, excuse me while I go update my Facebook status.

NFC Gaining Steam in the United States

I have been following the news out of this year's Consumer Electronics Show in Las Vegas.  One of the technologies that have been getting some press is the area of mobile payments and near field communications (NFC for us tech types).

I have been making statements for some time now that I think mobile payments and NFC are going to gain traction in the US in 2012, and it sounds like I might be right.  Thanks to Moneto, the adoption of NFC for use as a payment platform may accelerate due to the fact that the consumer does not have to buy a new phone in order to use it.

Moneto is actually a service from DeviceFidelity and Spring Card Systems that uses a microSD card, embedded with NFC technology to enable any phone to act as a mobile wallet.  Any Android phone or table that supports microSD can use the NFC enabled card.  Android users of Moneto are also required to place a sticker on the battery, underneath the cover, in order to assist the NFC signal.  Consumers will be able to buy Moneto is a few months for $30.

iPhone users are not left out either.  Moneto has released an iPhone case, which fits all iPhone models, that has an embedded NFC chip in it.  The case is available now for $80, with $10 in preloaded funds.

This services works with the MasterCard PayPass service and comes with a prepaid MasterCard for the consumer to reload funds onto.  In addition, Moneto will also work with Google Wallet, and the forthcoming Isis service, which is a carrier and credit card sponsored NFC service due out later this year.

So what’s the big deal?  This is the first service and device that will permit users to start using NFC and mobile payments without having to make a new investment in a phone, change carriers, or sign a new service agreement with the existing carrier.  As NFC continues to gain steam here in the US, Moneto is well positioned to further strengthen the NFC based mobile payments market here in the US.

Apple Quietly Acquires Semiconductor Startup

Amidst all of the hubbub at the annual Consumer Electronics Show this week, Apple was quietly at work bolstering their ranks in what some believe is a very important area; engineering, specifically chip engineering.  Apple confirmed this week that it completed its acquisition of Israeli based Anobit Technologies this week.  Apple did not disclose the terms of the deal, but it is believed they paid between $400 and $500 million for the semiconductor startup.

If you don’t follow technology closely or this segment of the business, you may be wondering why this is an important acquisition for Apple.  This is where I come in.  I will give you my perspective on why I think this is a strategic purchase Apple.  Only time will tell if they over paid, but the acquisition is still significant for two reasons.

First, Anobit’s flash memory controllers are a key component of all of Apple’s current leading products.  The iPod, iPad, iPhone, and the MacBook Airs all utilize this technology.  Anobit makes a key component that improves the speed and performance of flash memory chips (NAND chips for the technically inclined).  These chips are all used in the aforementioned Apple products.

Apple has been moving away from mechanical hard drives to the more robust and higher performing flash storage devices for its devices.  It is widely rumored that the MacBook and MacBook airs will begin only shipping with this sort of storage technology in the coming years. This acquisition would be very key in allowing Apple to put this sort of a technology into their MacBooks at a price point that is competitive and palatable by Apples customers.

The other piece of this acquisition that is strategic is that Apple just added about 160 chip engineers to their engineering ranks, which already numbered somewhere around 1000.  This is key as Apple designs its own chips; they don’t rely on AMD, Intel, or IBM to produce the chips that run their devices.  Apple designs their own chips and then outsources the production of those chips to semiconductor plants around the world.

It goes without saying that as it relates to computers; everything starts with the chip that is running the computer.  Apple in a sense got a two for one deal in this acquisition, and felt it was time to own a company to help them continue innovating and creating more mobile and post-pc devices for the next several years.