Facebook: It’s tough at the top

26th March 2012

Facebook pays financiers a cool $55 million

But the IPO has launched a whole industry of its own as patent chasers and investment banks all have an eye to the action. And others question the future corporate governance while psychologists claim to have found a link between social media usage and narcissism.

Facebook gets hard cover backing

With just five per cent of the equity on offer to new investors, the IPO is intended to raise $5bn, valuing the firm at $100bn.

But just in case something goes wrong and the shares don't fly off the shelf, some of Wall Street's finest have lined up to buy the unwanted stock. They are underwriting – or guaranteeing – the success of the issue for just 1.1 per cent or a cool $55m.

Paying for prestige

The financiers spin this underwriting percentage as really cheap – on most IPOs, the  fee ranges from three to seven per cent which would net them $150m to $350m on a Facebook basis. They – or their unnamed spokespersons – say lead banks including Barclays, JP Morgan and Goldman Sachs as well as some 25 others are doing this special low price for the prestige of involvement with Silicon Valley's most spectacular IPO plus the hope of getting into whatever's the next big thing.

Will they have to do anything for their money other than sign their corporate names on a list?  Probably not. But there are some negative stories swirling around – most markedly on the patent issue. And it's not just Yahoo.

Website Techcrunch (which is owned by AOL) reports on a further raft of patent disputes. It's worth reading in some detail.

The patent issue is a constant thorn

Techcrunch says: "Facebook has now been sued by Mitel, an Ottawa, Canada-based enterprise IT company; and there is emerging evidence of others, including AOL, filing fresh patent applications to cover ever more aspects of social media services.

"The Mitel Networks suit, filed on March 16, 2012, in the U.S. District Court in Delaware, alleges infringement of two different patents, one for an "automatic web page generator" and another for "pro-active features for telephony." They date from 1999 and 2007.

"And two patent applications filed last week come from Compass Labs and AOL and respectively cover "user interest analysis and systems" and "content publication activity by a user."

Mitel says in the suit that Facebook infringed and continues to infringe on its patents. Mitel said that it had originally brought this to light in a letter dated July 2011, and another in September 2011.

"Mitel has suffered and will continue to suffer damage," the company's lawyers write. "Mitel is entitled to recover damages adequate to compensate for that infringement in an amount that will be ascertained at trial, but in no event less than a reasonable royalty."

Investors fret about corporate governance

This Wired blog raises even further questions. Given Facebook's genesis as the brainchild of Mark Zuckerberg and, this story alleges, the unwillingness of many at Facebook HQ to get involved with public listed company status – they have effectively been compelled to go down that route as a result of US securities law – some investors could worry about corporate governance issues.

It says: "Zuckerberg is about to become just one part of an institution much bigger than himself-a publicly listed limited-liability joint-stock company. The visionary who turned down a billion-dollar offer to cash out at the age of 22, the imperial CEO with complete control over the company he built from scratch, will now run a company owned by hordes of shareholders from all over the world.

"Zuckerberg clearly does not relish this prospect, and he has taken great pains to preserve his iron grip on Facebook. When the company goes public, Zuckerberg will still control 56.9 percent of the votes, will be free to single-handedly appoint directors, and will even be able to name his successor. Technically, Facebook may be going public, but Zuckerberg will continue to run it like his own privately held concern. Thanks to those safeguards, Facebook will probably weather its IPO just fine. But when the world's most successful young tech entrepreneur does everything in his power to minimize the impact of public ownership, it makes one thing clear: The IPO model is broken."

Narcissism and Facebook usage

And if that is not enough, here's a study that links Facebook with narcissism. Will it deter usage of the world's number one social media site?  Perhaps not, as heavy users may either be proud of their narcissism, don't know what it means or don't care anyway as long as Facebook does not impose user charges.

But just in case they can forget Facebook for a moment, here's the Greek myth of Narcissus.

He was a hunter known for his beauty. And he knew it. He was proud, and had no time for those who admired or love him. Nemesis, the goddess of revenge, saw this so she drew Narcissus to
a clear pool where he saw his own reflection and fell in love with it, not understanding it was a mirror image of himself. He attempted to touch his image, fell into the water and drowned.


More from Mindful Money:

Could a legal face-off with Yahoo shut Facebook?

Facebook IPO – Beware of the 'Hype-Cycle'

Facebook: Personal information has become a commodity

To receive our free email newsletter sign up here

Leave a Reply

Your email address will not be published. Required fields are marked *