Much Ado About Nothing

I have to take a break from the public/private thread ... just for today, and in reality, it's not all that far off target. Three days ago Facebook went "public". I'm not exactly sure what that means, really. It's a private company that is now held by different private persons (but not very different from who was holding it before). According to reports, there are now a good number of tens-millionaires that there weren't before. And yes, there are a number of newly minted paper-billionaires in the crowd as well, but I'm not sure what is "public" about that. Talking about the stock market and public makes about as much sense as talking about the public in relation to the Freemasons. But that doesn't stop us from getting excited, does it?

So what actually happened on Thursday? Well, take away the hype and the private fortunes and what's left? Right. Nothing. I didn't feel the earth miss a beat in its rotation. The Messiah didn't arrive. Cancer wasn't cured and neither was AIDS. And for those of you who think the stock market has something to do with the economy as a whole or its "health", well, I suppose you just have to go on living your illusion. Facebook -- at the moment -- is the most highly "valued" company in the world. And the only question that comes to my mind is "so?" Oh, don't get me wrong. There are no sour grapes here. Whether Mr. Zuckerberg is a pauper or billionaire makes no difference to me. Money is money and you're either beholden to it or your not. It doesn't make people people. Too often, it turns them into un-people, so let's hope this fate doesn't befall Mr. Z.

No, I'm just surprised by all the airtime such a non-event gets. Facebook is an advertising platform (when seen as a business, which it really is). Whether people can get in touch with old friends or post silly pictures of themselves or out themselves in ways they never would in person doesn't really matter. People are that way, and just being able to accumulate a good number of them in one place is attractive go advertisers. OK, some, like GM, got tired of no return on investment and pulled out. That Facebook generates only about one-seventh of the revenues of Goldman-Sachs (another peach of a company, considering how much public money went into them), it's now twice as "valuable". I think it's time we started reconsidering what we really mean when we use certain words. So, what is it that they really do as a business. It would seem very little.

And that's where this is all going to end, I'm sure. If the banks hadn't jumped in to the tune of about $300 million on that first day, the stock price would have closed lower than it started ... oh, by the way, that's considered a bust on Wall Street. What some people won't do to keep the illusion going. And, in the end, who's going to end up paying for all of this? You guessed it, the public. That's what going public is apparently all about.

Stock market 101b

As I mentioned yesterday, businesses have three options to generate extra cash, the third of which is issuing stock. We also saw that a stock issue can be private, but such offerings can also be public. These are the infamous (if at times not notorious) IPOs or "initial public offerings" that get lots of media coverage if they are big enough. In this case, the company decides to sell shares of ownership to the public, in the hopes that the demand for the new stock will raise the share price and thereby generate more cash.

On the other hand, such offerings can also be public. These are the infamous (if at times not notorious) IPOs or "initial public offerings" that get lots of media coverage if they are big enough. In this case, the company decides to sell shares of ownership to the public, in the hopes that the demand for the new stock will raise the share price and thereby generate more cash.

A few years ago, a German low-cost airline went "public" and sold €1,000,000,000 worth of stock on the first day! Not bad, eh? But this is where the "stealing" comes in. They didn't take all that cash home with them. After paying fees and premiums and costs for staging the sale, they had a mere €400,000,000 to take home. I don't think it is out of line to wonder why the people who put on a sale earn more than the folks for whom the sale takes place, but that's another story.

What's worth noting, though, is that this is a one-time deal. Once those shares are in the public domain (on the stock market), they can be bought and sold and speculated with and the issuing company receives no money whatsoever when these shares change hands. If I buy some stock at the beginning, then the company takes home some of that money. If I sell them to my friend Tom a week later, I get money from Tom, but I don't have to give anything to the issuing company. They don't own those shares anymore: I did, and now Tom does.

This is the point, unfortunately, that most people miss. The issue company only has so much to do with its stock as it is concerned to keep its value reasonably high, but this is more for image than financial reasons. People who buy and sell stock do so to make money. Anyone who "plays the market", as it is most accurately described, buys stock in the hopes that the price with rise so that they can sell it later for a profit. In other words, the company should do well enough that the share price rises so they can make money. Since the issuing company's only obligation is to increase it's share price so that others can generate income, it is not truly accurate to call the stock buyers "investors". They aren't investing in the company, they are investing in themselves. Technically, the shareholders are "owners" but for the most part they are only concerned about the share price, not the working conditions, the employees, the customers, or the products or services themselves … or only insofar as these things have a positive influence on the share price.

The stock market, then, is really more like a casino than an investment, as one chief financial officer told me. What amazes me the most, though, is the amount of media coverage this particular casino gets. Fluctuations in the stock market are more often than not market players' emotional reactions to all kinds of events, but not really a sound indication of the health of the economy. I don't think it's ever a good idea to take your temperature in a casino.

Stock market 101a

In the world of business, there are three ways for an organization to generate extra cash. Extra? Yes, that is, money that is not generated through regular operations. Money the organization wants to invest. We all know that it is wiser to save up for a large purchase before buying it, but in the go-go-go, consumer-driven world today, we too often resort to credit to satisfy our impulses. Some things, like a home, of course, are really too significant a purchase to save up for, but cars and stereos and smart phones and refridgerators are in fact manageable.

The savings of business are called retained earnings, and sometimes these reserves are not enough to finance the next step forward for a business, so they have to get the money elsewhere. The three avenues open to them are, as in everyday life, to beg, borrow or steal. Really? Let me explain what I mean.

Let's start with borrowing since it is the most familiar to most of us. You go to a bank (usually) or other financial institution (could be a credit union, or Aunt Marge) and you negotiate a sum to be paid back over a specified period of time, and at a certain rate of interest. The riskier the bank feels this lending is, the higher the interest rate you end up paying. (It was once rating agencies which made such decisions, but they managed to tarnish their own reputations lately.)

The second way is to beg. Actually, the organization itself offers promisory notes (in everyday speak: IOUs) called bonds. The organization is, within certain limits of course, free to say when and how the bonds will be paid out, but there are several agreed on standards. Perhaps the most commonly known type of bond is the savings bond. When you buy a bond today for $37.00, in seven years the government promises to pay you back $50. The organization is basically saying, "trust me", and if you do, you can lend it money.

Whimsical as I am, I listed "stealing" as the third way, but that's obviously not 100% accurate. The third way of generating cash is to issue shares of stock. These shares represent ownership, so the percentage of shares you hold determines your "share" of the business. Such an issuing can be private, that is, you offer a part of your business to someone else and you negotiate between yourselves how many shares and what they are worth. We don't often hear about these kinds of transactions in the news.

So now we have the basics and we can get to the fun part tomorrow.