Worry About a Facebook Hijacking

 | Feb 02, 2012 | 6:15 AM EST  | Comments
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Facebook has an astounding level of profitability. This company, like Google (GOOG), has to hire to meet insane demand. But unlike Google it looks like everything can and will be monetized as the management seems more disciplined and focused on shareholder returns.

I could go over the metrics -- how fast it is growing, how much money it's making -- but instead I just want to dwell on what happens when you have a deal where lots of people like the company's product and they want in. I am talking about a deal that occurred more than a dozen years ago.

I am talking about TheStreet.com.

TSCM, the symbol at the time, was oversubscribed the moment it was filed, just as I am sure Facebook will be. The buyers tended to be people who liked the product because we had caught the great wave of individual investors, a wave that peaked a long time ago.

The deals at the time were all red hot, courtesy of decisions made by the underwriters to limit the float to small amounts hoping that later on there would be secondaries at higher prices. But they only knew how to gauge the institutional investing public, not the individual investors who flooded in from over the transom. That's how a $20 deal could open in the mid-60s, a rush of market orders took it there. (If you want to read more pick up "Confessions of a Street Addict," as I have all of the gory details recounted.)

And that's what I am afraid can happen to Facebook. They are talking about offering $5 billion in stock for what might be a $100 billion company. Forget for a moment that at $100 billion it might be overvalued and focus on the moment at hand. If users of Facebook overwhelm the system with smaller orders that wrench the stock from the syndicate managers, this one could open way too high, stay up there for a little and then fall back as even the biggest institutions decide they want to take profits.

As far as the filing, I see no flies on it. The growth seems sustainable, although not accelerating, which is reasonable given the base that it's coming from. The advertisers seem eager to buy space, although I do need to see if it can make as much money mobile as it can on the laptop or desktop, something that's ailing Google.

It's the allocations and the possibility of a sliver of stock offered while over-the-transom buyers gang tackle the darned thing at, say, a $120 billion market cap. That's what we have to watch for. In that sense, what matters isn't how it is doing. The merchandise is terrific. It's the price that the deal gets hijacked at. Right now it is more than likely that because of the inherent excitement among retail investing users, you are going to go from a real good valuation on the offering, which you definitely want to be in if you can, to an obscene valuation by the time it opens and, reluctantly, you may just have to part with your stock, rather than buying more in the aftermarket.

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