Tag Archives: IPOs

If you haven’t heard of BATS, you may be very well to question what it is. BATS has become the third largest exchange for equities in the United States, behind NASDAQ and the NYSE. While both of these exchanges as primary exchanges, BATS operates more of a back up exchange, as a place to provide additional liquidity.

In past years, a lot of these type of Electronic Communications Networks (ECNs) have been gobbled up by some the larger trading systems such as NYSE and NASDAQ. NYSE itself bought Archipelago Exchange in the mid 2000s. NASDAQ on the other hand purchased Brut and Instinet, two previous ECNs.

On Friday, there was a big fuss because BATS launched its own IPO primarily traded on its own proper exchange in order to try to bring itself business. This brought about a rare circumstance where a company’s IPO begins trading on its own exchange. Additionally, ECNs have come under criticism as a result of 2010 flash crash, which many people blame on Arca. But going back to last week, when BATS started trading, the company caused two big errors in trading.

First, Apple somehow got to be mispriced by $9.00 below its trading value. This caused a half across all exchanges in order to figure out what was going on with the stock. While this is a little crazy, it’s not uncommon for this to happen with some stocks. I have seen thinly traded stocks crash below the level of support for some exchange listed stocks to the point that it crashes below support (the price where anyone left is willing to buy the stock).

Second, BATS own stock got to be mispriced. This is a bigger deal, because there hadn’t been a stock listed primarily on the BATS exchange previously. I find this to be a problem because it questions the reputation of the BATS exchange, especially because they’re dealing with their own exchange. After the mishap, they elected to remove the IPO of BATS from the entire market, something that should have people concerned, at least in the short term.

While I think BATS will get their operations in order, it is going to serve as a black mark. Still, I don’t think that the sky is falling. As a society, a big part of our attention is going to be in finance and the continued advancement of technology in this sector. While this is a bad day for BATS, make no mistake, it shouldn’t hurt the company’s long term prospects. They’ve messed up and if history goes to show, people learn from their mistakes.

Building an order book in a stock that’s just opening is much different than doing it for stocks that have been trading already. First of all, people need to establish support and resistance (a large collection of offers [prices] where people are ready to sell stock). This is not easy because while analysts may have opinions on stocks, they have no precedent. Each one wants to see what the other will do first. One small mistake can send a stock tumbling down, and that’s what happened with BATS on Friday.


A lot of the reports I see going out in the market give Facebook a value of somewhere in between $75 and $100 billion. I realize that Facebook is unique in the marketplace but I think people are forgetting about some of the comparables in the past. Does anyone remember Friendster or Myspace?

Friendster has not had a valuation since 2009 and in 2011 went through some major changes in its services. Originally, the site was known as a social networking site, one of the first I remember ever using but never being that excited about it. The site, at its peak, was valued at $53 million and at one point turning down a $30 million bid from Google. The most recent data I found on the valuation of Friendster has a transaction value of $26.4 million. Since then, the company has turned into more of a social gaming site and focused its attention in Asia. I just find it funny that no one mentions this when valuing Facebook.

Myspace is a different story and one that I feel is much more important to mention. First of all, at one point someone posted that Myspace at one point had a valuation of $65 billion! That sounds scarily close to Facebok’s valuation. While the posting itself admits this was based on a per user basis coming of Facebook’s valuation and suggests that $5 billion is more acceptable, it did invite that idea. If you want to look at a history of Myspace’s valuation, look here: The most important thing to note is that in June 2011, Newscorp sold 90-95% of its stake in Myspace for $35 million, six percent of what it purchased it at. This gives me a company valuation of around $40 million. The other comparison I want to allude to Myspace has to do with Facebook’s new Timeline. Critics of the new Timeline have said it looks way to much like Myspace. Given these criticisms, shouldn’t the market be wary of these concerns?

While I make a lot of criticisms, it is not to say I do not like Facebook. I think it’s a great social networking platform. They have brought people together in a way that hasn’t been done by anyone else in the social networking space. I wouldn’t be communicating with soccer fans talking trash about Real Madrid (as I’m a Barcelona fan) every time El Clásico comes up. I would not be able to share information with people I know that are completely on the other side of the world in a quick and easy manner. I just think that the market isn’t taking into account the failed social networks in the past.

So basically, I have come up with a ‘back of the envelope valuation’ of Facebook. I have not done a discounted cash flow valuation but rather, I just wanted to take the enterprise values of the street, a well-known NYU professor, Aswath Damodoran, and the two companies mentioned previously. I basically weighted the outcomes of Facebook going the way of Myspace and Friendster each at 10%. I believe that given what has happened in the past, this is not entirely inappropriate and in reality, I think putting it higher would be more correct but since this method of valuation is not the most proper, I think 10% is ok to use. For the other 80%, I have split it evenly between Professor Damodoran’s valuation (see here: of $70.9 billion and the street’s valuation of $87.5 billion (87.5 being the midpoint between 75 and 100). When I calculate the value using these weighted averages, I get a value closer to $63.4 billion. Following Damodoran’s process, I subtracted debt from the Enterprise Value and added cash to come up with an equity value. After that, I subtracted the option value and came up with a net equity value of about $60 billion. Dividing this by the number of shares mentioned in their filing, this comes up with a value of about $25.69. Again, I want to stress that this isn’t a properly done valuation. But if Facebook is going to be priced at around $30.66 or $41.37 (based on a $75 billion and $100 billion valuation, respectively), the price is just too high. I am not saying the company won’t succeed, but from a value standpoint, it just may be too pricey.

I’m not after Zuckerberg or anything. I just think that instead of his potential $28.4 billion stake in Facebook, it should be more around $20 billion. For a link to my quick math, look here