Best of the Week
Most Popular
1.Spain Ignores Scotland Lesson as Catalan Independence Referendum Could Spark Civil War - Nadeem_Walayat
2.Used Car Buying From UK Dealer Top Tips, CarMotion.co.uk Real Customer Experience - N_Walayat
3.Spanish New Civil War Begins as Madrid Regime Storm Troopers Quell Catalan Independence Rebellion - Nadeem_Walayat
4.Virgin Media Broadband Down, Catastrophic UK Wide Failure! - Nadeem_Walayat
5.Are the US Markets setting up for an Early October Surprise? - Chris_Vermeulen
6.The Pension Storm Is Coming To Europe—It May Be The End Of Europe As We Know It -John_Mauldin
7.Stock Market Crash 2018; Will it Prove to be Another Buying Opportunity - Sol_Palha
8.The Profoundly Personal Impact Of The National Debt On Our Retirements - Dan_Amerman
9.Stock Market as Good as it Gets; Like 2000 With a Twist -Gary_Tanashian
10.1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - Nadeem_Walayat
Last 7 days
Debt-Driven Consumer Economy Breaking Down - 23rd Oct 17
Next Wall Street Stock Market Crash Looms? Lessons On Anniversary Of 1987 Crash - 23rd Oct 17
This Super Metal Is Set To Soar By 300% - 23rd Oct 17
More New Record Highs As S&P 500 Gets Closer To 2,600 Mark - 23rd Oct 17
Another Minor Stock Market Top? - 23rd Oct 17
Bitcoin Hits $6,000, $100 Billion Market Cap As Helicopter Ben and Jamie Demon Warn The End Is Near! - 22nd Oct 17
Time for Caution in Gold Miners - 22nd Oct 17
“Great Rotation” Ahead; Will it Be Inflationary or Deflationary? - 21st Oct 17
The Trigger for Volatility, Rates and the Next Crisis - 21st Oct 17
Perks to Consider an Agent for Auto Insurance - 21st Oct 17
Emerging Megatrends Hurting Consumers - 21st Oct 17
A Catalyst of the Stock Market Bubble Bust - 21st Oct 17
Silver Stocks Comatose - 21st Oct 17
Stock Investors Ignore What May Be The Biggest Policy Error In History - 20th Oct 17
Gold Up 74% Since Last Stock Market Peak 10 Years Ago - 20th Oct 17
Labour Sheffield City Council Employs Army of Spy's to Track Down Tree Campaigners / Felling's Watchers - 20th Oct 17
Stock Market Calm Before The Storm - 20th Oct 17
GOLD Price Creates Bullish Higher Low - 20th Oct 17
Here’s the US’s Biggest Vulnerability in NAFTA Negotiations - 20th Oct 17
The Greatest Investing Lesson Learned from the 1987 Stock Market Crash - 20th Oct 17
Stock Market Time to Go All-in. Short, That Is - 19th Oct 17
How Gold Bullion Protects From Conflict And War - 19th Oct 17
Stock Market Super Cycle Wave C May Have Started - 19th Oct 17
Negative Expectations, Will the Stock Market Correct? - 19th Oct 17
Knowing the Factors Affect your Car Insurance Premium - 19th Oct 17
Getting Your Feet Wet In Crypto Currencies - 19th Oct 17
10 Years Ago Today a Stocks Bear Market Started - 19th Oct 17
1987 Stock Market Crash 30th Anniversary Greatest Investing Lesson Learned - 19th Oct 17
Virgin Media Broadband Down, Catastrophic UK Wide Failure! - 19th Oct 17
The Passive Investing Bubble May Trigger A Massive Exodus from Stocks - 18th Oct 17
Gold Is In A Dangerous Spot - 18th Oct 17
History Says Global Debt Levels Will Lead to Another Crisis - 18th Oct 17
Deflation Basics Series: The Quantity Theory of Money - 18th Oct 17
Attractive European Countries for Foreign Investors - 18th Oct 17
Financial Transcription Services – What investors should know about them - 18th Oct 17
Brexit UK Vulnerable As Gold Bar Exports Distort UK Trade Figures - 18th Oct 17
Surge in UK Race Hate Crimes, Micro-Racism, Sheffield, Millhouses Park, Black on Asian - 18th Oct 17
Comfortably Numb: Surviving the Assault on Silver - 17th Oct 17
Are Amey Street Tree Felling's Devaluing Sheffield House Prices? - 17th Oct 17
12 Real-Life Techniques That Will Make You a Better Trader Now - 17th Oct 17
Warren Buffett Predicting Dow One Million - Being Bold Or Overly Cautious? - 17th Oct 17
Globalization is Poverty - 17th Oct 17
Boomers Are Not Saving Enough for Retirement, Neither Is the Government - 16th Oct 17
Stock Market Trading Dow Theory - 16th Oct 17
Stocks Slightly Higher as They Set New Record Highs - 16th Oct 17
Why is Big Data is so Important for Casino Player Acquisition and Retention - 16th Oct 17
How Investors Can Play The Bitcoin Boom - 16th Oct 17
Who Will Be the Next Fed Chief - And Why It Matters  - 16th Oct 17
Stock Market Only Minor Top Ahead - 16th Oct 17
Precious Metals Sector is on Major Buy Signal - 16th Oct 17
Really Bad Ideas - The Fed Should Have And Defend An Inflation Target - 16th Oct 17
The Bullish Chartology for Gold - 15th Oct 17
Wikileaks Mocking US Government Over Bitcoin Shows Why There Is No Stopping Bitcoin - 15th Oct 17
How to Wipe Out Puerto Rico's Debt Without Hurting Bondholders - 15th Oct 17
Gold And Silver – Think Prices Are Manipulated? Look In The Mirror! - 15th Oct 17

Market Oracle FREE Newsletter

3 Videos + 8 Charts = Opportunities You Need to See - Free

Is Facebook (Nasdaq: FB) a Replay of the AOL/Time Warner Deal?

Companies / Tech Stocks May 24, 2012 - 07:26 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleMartin Hutchinson writes: I hope you didn't buy shares of Facebook (Nasdaq: FB). The valuation was always too aggressive.

And increasing both the price and amount of Facebook stock at the last moment ensured that both underwriters and retail investors ended up with far more shares than they bargained for.


In fact, the Facebook fiasco reminds me of another deal that marked the peak of the dot-com boom.

No, not the ineffable and rather sweet Pets.com- their IPO was far too small a deal to have genuine market significance.

Instead I'm talking about the AOL and Time Warner merger announced on January 10, 2000.

Like Facebook, the deal was sold as a big success. It was only later that it quickly became clear that AOL had sold itself at the absolute peak of the market.

From there on out it was all downhill as the storied merger practically top-ticked the market.

Before Facebook There Was AOL
AOL had built up a nice business from "dial-up" Internet access, but it was already obvious by January 2000 that the arrival of broadband Internet would make for a difficult transition.

As such, AOL's market capitalization of around $200 billion was purely the result of the frothy market of 1999.

Nevertheless, that rich valuation enabled AOL to become the senior partner in an acquisition of the Time Warner media conglomerate, getting 55% of the merged company in a deal valued at $350 billion. It was the largest merger in U.S. history.

At the time there was a great deal of talk about how the Internet had revolutionized life to such an extent that AOL's Internet access and modest content businesses would provide immense synergy to Time Warner's magazine, cable TV, film and broadcasting assets.

In reality, the deal was a disaster for Time Warner.

In the aftermath, Time Warner reported a loss of $99 billion in 2002 because of AOL-related write-offs, Steve Case resigned as chairman in January 2003, and AOL was spun off again in 2009.

Time Warner's market capitalization fell from $350 billion to below $20 billion in the ensuing downturn. It is only $33 billion today.

In short, the AOL/Time Warner merger marked the peak of the dot-com bubble. The Nasdaq Composite index peaked at 5,048.62 two months later and has only recently risen above half that value.

The ability of AOL to be valued at more than the giant Time Warner came to be seen as an anomaly, and the difficulties experienced by the deal helped to puncture market euphoria.

Subsequent deals valuing Internet companies at bubble prices proved difficult or impossible to get done. The market began to slide from the spring on, with confidence finally ebbing away in the contentious 2000 election aftermath.

Facebook (Nasdaq: FB) is AOL Revisited
To me, the Facebook IPO looks very much like the AOL of 2000.

Its growth is already slowing, with first-quarter revenue down on the fourth quarter. Unlike Google (Nasdaq: GOOG) or Apple (Nasdaq: AAPL), it does not seem an essential part of the Internet scene.

Indeed even in Facebook's business sector, LinkedIn (NYSE: LNKD), the business connections social network with a market capitalization of $10 billion, has a more well-defined economic purpose.

Like AOL, Facebook's valuation was pushed beyond its natural limit, partly because the company had large numbers of well-connected shareholders who wished to exit at the maximum possible price.

The issue was too large, the issue price was set too high, and the Nasdaq trading glitch prevented the stock from getting the initial "pop" that might have convinced foolish retail investors that it was too good to miss.

The company has around $10 billion in cash, so it isn't worthless, but I would have a hard time assigning it a value of much above $15 billion-say $5 or $6.

Falling to $31 in its first trading days, Facebook is making good progress towards that modest goal.

If it falls below $19 or so before Goldman Sachs' private equity clients can get out, I shall smile with relief. There was altogether too much of an insider ramp by the well-connected at $19/share followed by a sale to suckers at $38 within a year or so.

Like the AOL/Time Warner merger, the Facebook IPO has messed up the market for the rest of the tech sector as a whole and social network companies in particular.

The underwriters were left with a lot of stock, and were chiseled down on commissions, so they won't be anxious to repeat the process.

Companies with massive private equity followings will find an unenthusiastic reception in the public markets, as investors will suspect that, like Facebook, they were gigantic "pump and dump" operations.

If Goldman's buddies lose money on Facebook, the appetite for late-stage private equity investment will be curtailed -- no bad thing as it is too often used as a substitute for a proper IPO to the general public.

Valuations, in any case, look likely to decline. To that extent the "social network" bubble will have burst, and probably the second Internet bubble also.

In the long run, the economy will benefit from this as resources are reallocated to more useful sectors; in the short run the process will inevitably be painful.

As investors, we might want to look at weeding our tech portfolio, however good our investments' long-term prospects may appear.

Source :http://moneymorning.com/2012/05/24/is-facebook-nasdaq-fb-a-replay-of-the-aoltime-warner-deal/

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2017 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Catching a Falling Financial Knife