Don't shoot the messenger....!!

“The world’s most public private company will now be the world’s most private public company”. This was the headline on the website of the Washington Post that day Facebook filed for its IPO. Now, I am no expert on valuations or investments for that matter, but I can definitely say that this IPO will confirm the age old adage of “Never underestimate the predictability of human stupidity”.

Before we get into the intricacies of DCF valuations, P/E multiples and so on, let’s go back a step to basic corporate finance. Why do corporations tap the capital markets? Well, the capital markets provide sources of financing, be it debt, equity or any structured offering.

A cursory glance at the company’s financial statements will reveal that that Facebook had around $3.5bn in cash at the time of filing. So why is the company interested in raising just $5bn from the IPO? What does Facebook aim to achieve with $8.5bn which it cannot do with $3.5bn. And considering that interest rates are at an all-time low in the US, debt financing would definitely have been a cheaper option. So it’s definitely not a question of money. Then why go public? Why bring in all the hassles associated with running a public company? All the financial reporting, disclosures, conference calls etc.

I believe the only reason Facebook is going public is because its Venture Capitalists want an exit. And they want out before the social networking bubble bursts. We’ve seen this before in 2000, when every company that was even remotely associated with having a .com at the end of its name was public and was commanding exorbitant valuations. It took some time before analysts around the world figured out how to value these corporations. And, when they did, boom, we all know what happened. Some people call it the bursting of the dot-com bubble; whereas the smarter guys merely said that sanity has been restored.

It will take some time, possibly another round of bailouts by the Federal Reserve before sanity can be restored this time and mainly because the bubble is much bigger this time around. Till then LinkedIn (NYSE: LNKD), Groupon (NASDAQ: GRPN), Zynga (NASDAQ: ZNGA) and of course Facebook are all a big BUY.