Best of the Week
Most Popular
1.U.S. Inner City Turmoil and Other Crises: Ron Pauls Predictions for 2015 - Dr_Ron_Paul
2. What’s In Store For Gold Price in 2015? - Ben Kramer-Miller
3.Crude Oil Price Ten Year Forecast to 2025: Importers Set to Receive a $600 Billion Refund - Andrew_Butter
4.Je ne suis pas Charlie - I am not Charlie - Nadeem_Walayat
5.The New Normal for Oil? - Marin_Katusa
6.Will Collapse in Oil Price Cause a Stock Market Crash? - OilPrice.com
7.UK CPI Inflation Smoke and Mirrors Deflation Warning, Inflation Mega-trend is Exponential - Nadeem_Walayat
8.Winter Storms Snow and Wind Tree Damage Dangers, DIY Pruning - Nadeem_Walayat
9.Oil Price Crash and SNP Independent Scotland Economic Collapse Bankruptcy - Nadeem_Walayat
10.U.S. Housing Market Bubble 2.0 Meet the Pin - James_Quinn
Last 5 days
Stock Market Test of Strength - 26th Jan 15
Is the Gold Price Rally Over? - 26th Jan 15
ECB QE Action - Canary’s Alive & Well - 26th Jan 15
Possible Stock Market Pop-n-drop in Store For SPX - 26th Jan 15
Risk of New Debt Crisis After Syriza Victory In Greece - 26th Jan 15
How Eurozone QE Works: A Guide to Draghi's News - 26th Jan 15
Comprehensive Silver Price Chart Analysis - 26th Jan 15
Stock Market More Retracement Expected - 26th Jan 15
Decoding the Gold COTs: Myth vs Reality - 26th Jan 15
Greece Votes for Syriza Hyperinflation - Threatening Euro-zone Collapse or Perpetual Free Lunch - 26th Jan 15
Draghi's "No-growth" QE Money for Stocks, Zilch for the Economy - 25th Jan 15
Unjust and Undeclared Wars - 25th Jan 15
The European Central Bank Commits Monetary Suicide - 25th Jan 15
Stock Market ECB EQE week - 25th Jan 15
Gold And Silver Timing Is Most Important Element - 25th Jan 15
The Best Way to Invest in the Next Alibaba Internet Stock IPO - 25th Jan 15
The Outpatient Surgery Business Rains Cash into Healthcare Stocks - 25th Jan 15
Stock Traders Flock to Gold GLD ETF - 24th Jan 15
10 Reasons Why You Need an Offshore Bank Account - 24th Jan 15
Goldman Sachs Blankfein - Regulation is Like Background Noise - 24th Jan 15
Gold in Euros Surges As ECB To Print Trillion Euros and Greek Election This Sunday - 24th Jan 15
Gold Bear Market Rally or New Bull ? - 24th Jan 15
Euro-zone 'QE already Working' Says IMF Lagarde - 23rd Jan 15
ECB and EU LTRO and QE for Dummies: Or, Make These Trades - 23rd Jan 15
Debt and Deflation: Three Financial Forecasts - There's More Than Falling Prices - 23rd Jan 15
Market Should Not Doubt' Mario Draghi ECB QE - 23rd Jan 15
Francs, Bonds, Barrels, and Bail-Ins - 23rd Jan 15
Are Plunging Petrodollar Revenues Behind the Fed’s Projected Rate Hikes? - 22nd Jan 15
Stocks Bear Market Lessons from History - 22nd Jan 15
Russia's Plans for Arctic Supremacy - 22nd Jan 15
166 Trillion Reasons Why Bank Stocks Are So Cheap - 22nd Jan 15
Will Gold Price Break Out Once Again? - 22nd Jan 15
The Cult of Central Banking - 21st Jan 15
Five Stock Market Questions Wall Street Hopes You’ll Never Ask - 21st Jan 15
China's Yuan Enters the Currency "Big Leagues" to Take on the Dollar - 21st Jan 15
Investor implications of QE by the ECB - 21st Jan 15
Deflation Bonanza! And the Fool's Mission to Stop It - 21st Jan 15
Messin' With My Financial Brain - 21st Jan 15
Are Stock Market Buyouts Checking Out? - 20th Jan 15
Legal “Steroids” Are Making This Tech Stock a “Buy” - 20th Jan 15
Are Stock Market Storm Clouds Massing? - 20th Jan 15
The Swiss Release the Kraken! - 20th Jan 15
The European Union, Nationalism and the Crisis of Europe - 20th Jan 15
Swiss Say No to QE - 20th Jan 15
Gold Demand Explodes as Volatility and Fear Stalk Market - 20th Jan 15
The Truth About This Stock Market "Meltdown" Indicator - 20th Jan 15
Markets 2015 More Of The Same? - 20th Jan 15
Is Market Sentiment Shifting to Gold? - 20th Jan 15
U.S. Dollar’s Major Breakout and Gold’s Simultaneous Rally - 19th Jan 15
Silver Price Breaks Out on Swiss France Euro Decoupling - 19th Jan 15
Gold Bullish Inverse Head and Shoulders Pattern - 19th Jan 15
Bundesbank Announces Repatriation of 120 Tonnes of Gold from Paris and New York Federal Reserve - 19th Jan 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

State of US Markets 2015 Report

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

© 2005-2014 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

Free Report - Financial Markets 2014