The following is an excerpt from Matthew Yglesias | September 12, 2012 | Slate.com |
Since the May IPO that valued Facebook at $100 billion, nothing much has gone well for the social media giant. The price of shares steadily tumbled through the summer, down to about half their IPO value before a stirring talk by founder and CEO Mark Zuckerberg at the Techcrunch conference in San Franciso yesterday helped give the stock a small bounce.
But as Facebook owners freaked out by the weak share price already know, there’s really nothing they can do to make Zuckerberg do anything about it. That’s because, as I noted when Facebook first filed its IPO paperwork, the company’s corporate governance structure is unusual. Specifically, there is no governance structure to speak of. An absolute majority of voting power is controlled by Zuckerberg personally, and there’s no requirement for members of the board of directors to be “outsiders” to the company. The firm is publicly listed and you can buy and trade its shares on the stock market, but the company is Zuckerberg’s personal fiefdom, at least until he wants to cash out some of his voting shares.
The current crisis in Facebook’s share price shows what a wise decision it was to preserve that personal control.
You can think of a stock price as driven by two separate factors. One is the company’s profits, or “earnings” in accounting-speak. The other is the price-to-earnings ratio—in other words, the total value of the company’s stock divided by its profits. The economy-wide P/E ratio bounces around quite a bit from year-to-year, driven by various manias and panics, but the long-term average tends to hover around 15. But individual companies can diverge quite a bit from this trend. A profitable company in an industry that’s in predictable long-term decline (think newspapers in 1999) or that has limited growth potential (an electrical utility that can’t really move into new markets) might have a lower P/E ratio. Alternatively, a new-ish company that’s poised to grow faster than the corporate sector as a whole may have a high P/E ratio.
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