Exit Strategy — Is Facebook Going Public Simply a Means to Liquidate Assets?

Peter Thiel is always on the cusp of the next Internet revolution. Remember PayPal?

Peter Thiel made international headlines this week by selling off around $400 million worth of shares in Facebook, the Internet social media network that practically created the game.  Thiel is a director of the company that was famously created from Mark Zuckerberg’s Harvard dorm room only to mushroom to a market value of more than $100 billion.  Not exactly a vote of confidence for investors, huh?  I suppose the only positive about watching one of the top executives at Facebook,Inc. cash out most of his stake in the company is that apparently someone was willing to purchase it.

That’s what’s amazing about these stories.  The media happily reports that one guy, Peter Thiel, suddenly decided to trade in over half of his shares in Facebook for the lofty sum of $400 million.  But nowhere will you find any information about who purchased the stock from him?  With a stock that has plummeted since its initial public offering, now worth almost half of what it was originally offered at, and with tons of speculation, controversy, and investor disappointment with its performance thus far, it makes you wonder immediately who would have purchased that much of the stock?  And yet, someone did.  Thiel pulled it off.

Imagine the conversation as you try to pawn off $400 million shares of Facebook stock to someone.  “I just know we are going to see this stock go up,” says the director of the company.  “It’s a good investment.  Facebook is on the upswing and you will see great returns on this in the future.”  Answer:  “Then why are you selling it?”  Why would the director of the company be unloading shares like this if he had faith in the direction and longevity of the company?

There’s two possibilities here.  One is that the public offering of Facebook was just an elaborate scheme to find a way of liquidating its assets.  Think about it.  We’ve all heard the outlandish estimates that the company was worth in excess of $100 billion.  But how?  From advertising revenue?  Facebook is not a subscription service.  Yes, they have millions upon millions of members, and that means awesome advertising revenue no doubt.  But $100 billion?

Like so many things in life, it’s easy to talk about how much a company is worth on paper.  But like a rare coin or other collector’s item, it is only worth as much as someone is willing to pay for it.  Perhaps Thiel and others in the Facebook organization had millions of dollars at their disposal on paper, but without selling the stock publicly, what difference did it make?  They own a piece of a company that they have no way to liquidate.  Sure, Facebook probably pays them huge salaries, but what about liquidating the millions in assets they have only in paper trails.  It seems at first glance that people like Thiel are selling out their stock while it is lower than expected because they have some insider information that tells them its going to bottom out farther.  So they sell the stock at a “loss” to get out while the getting is good.  But there is no loss for Peter Thiel.  Remember, Facebook gave him the stock before it was publicly offered.  Peter Thiel never purchased this stock the way investors did when it went public.  He already had it.  Now he’s selling it off at well below what it started at on the market, but he’s not losing a dime.  That $400 million is pure profit, and until it was publicly offered, there was no way for him to actually get his hands on that money.  Sure, he could talk about and show anyone that walks by how much stock he has and how much it is “worth.”  But he could never cash it, not until Facebook went public and the floodgates of the investors came in to turn those stock certificates into cold, hard cash.

Everyone's favorite social media site may have a dirty little secret.

The other possibility is that Facebook is truly being caught by surprise right before our eyes.  They made an ill-fated decision to go public.  It hasn’t turned out like they thought.  Peter is afraid that things are going to get a lot worse before they get better, if they ever do.  So, he bails, taking the money and running, while still keeping plenty of shares just in case things go better than they are forecasting.

The bottom line:  either possibility does little for investor confidence in Facebook.  The director of the company unloading stock like a bad habit is not going to make anyone real excited about what they have.  And yet, once again, someone paid $400 million to get it.  Despite the signs.

And no one has a clue who the $400 million man (or woman) is.  Where’s the SEC when you need them?