Web 2.0 Comes of Age..Or Does It? NASDAQ:FB fizzles.

It was supposed to be the golden moment of the new Internet Age. No tech bubble--we were going to get it right this time. Investors were more sensible now, and knew how to value web-based companies which had finally figured out how to monetize. The stage was set, and we would come out of the gates all guns blazing.

Pffft. Seriously? There are a few times that Wall St. drinks its own Kool-Aid on a macro level (re: housing crisis, tech bubble, S&L crisis, etc.), but by and large, it is good at weeding out singularly irrational events. Not this time.

Even the lead up to IPO was suspect. After months of speculation that Facebook would have to settle below the psychological $100B mark, underwriters unexpectedly boosted the issuance by 85M shares to 420M, and raised the expected range to $34-$38, tipping the valuation into nine-figure land; it raised a few eyebrows that the decision was made in the middle of a roadshow, but the changes were pegged to increased interest by PMMs. Then, GM withdrew $10M of ads, citing insufficient marketing value, echoing Morgan Stanley's own consumer IT analyst who projected declining revenue. The decision stoked fears about long-term profitability as Q1 2012 profits actually declined from Q4 2011 levels. 

On the big day itself, the debut was delayed by half an hour, trades were unexpectedly cancelled and then filled at lower prices hours later, and news that many institutional investors were flipping their allocations spooked the market. It is estimated that Morgan Stanley spent close to a billion dollars propping the price above the IPO level of $38. FB then went into freefall the next day, and mom-and-pop investors lost millions (retail investors had over 20% of the issuance, an unusually high number). It remains below $38.

All told, however, the decline is indicative that underwriters maximized value for insiders--a first-day pop is cited as evidence the IPO could have been priced higher. Mark Z. is now worth over $18B--he married college sweetheart Priscilla Chan this weekend, presumably delaying for favorable tax purposes. And while concerns remain over making money from the move to mobile and cracking the China market, analysts remain optimistic, with the median 1-yr estimate at $44 (the 21 underwriters aren't allowed to issue reports until the end of the lock-in period in 45 days). Maybe we'll get it right this time around.

Super-Powered Premier

I may officially be the only person left on the planet that has yet to see The Avengers after Disney reported the film took in $207 million in its opening weekend. But naturally, this number is once again going to be shattered when the Dark Knight Rises releases in a few months. See a trend here? Like clockwork, the blockbuster films of the year seems to "SHATTER" the hauls of past films. For a while, the opening weekend was a pretty stable affair, with Spiderman-2 being the benchmark of success. So what happened since then? For one, cinemas became these cash cows that doubled their ticket prices. I can't even watch a movie in New York without clearing 15 bucks, and even back home in Florida, 10-12 bucks for a ticket makes it twice as easy for a movie to take in these hauls compared to Spiderman-2 when movie tickets were $6-7. Second reason why these new movies are raking in the dough: 3-D and IMAX. Back in the day, when commercials said "in theaters and IMAX near you," IMAX was like this mythical concept that barely anyone went to see. Now it's become the ubiquitous measure of AWESOME and tickets sell out even before the movie gets out (a la Dark Knight Rises). The landscape for a movie to break records is ten times easier now than it was a few years back. Even if the Avengers is a great movie, and I'm sure it is, I'm not sure if these numbers should impress compared to the achievements of old. But maybe I'm just bitter that it beat Harry Potter's record. Wizards are cooler.

-Aureen Sarker (Photo Credit: Disney)

Monetizing Tumblr

                Tumblr, the place where memes turn viral, the place where we can find millions of Asians sleeping in university libraries (many of which are from NYU), and whatshouldwecallme—enough said. With 54 million registered users, people find it is a nice complement to Facebook as it is a channel for expression and Facebook is more of a channel for communication.

With such a huge following, Tumblr has announced it would start monetizing the site. Instead of placing traditional advertisements in random places in each website, they will allow companies to promote pages and specific posts as it is a more subtle and integrated way of connected with users. The issue is, users have been commercial-free since 2007 so they need to figure out a way to advertise without annoying the consumers.

While Tumblr is sort of walking on eggshells, I think this is a great decision and the only logical decisions after amassing such a huge audience. David Karp, Tumblr’s founder and CEO states that some firms are offering $25,000 just to promote a post. It is clear how beneficial this venture can be but they need to make sure the sponsored posts are as out of the way as possible while still maintaining a decent click-thru percentage. 

April’s Jobs Report: A Thorn In Obama’s side or A Thorn on the Rose of His Reelection?

Yesterday, the US bureau of labor gave a disappointing jobs report.  In April, only an additional 115,000 workers were added to nonfarm payrolls, making it the weakest gain in the last six months.  Additionally, the unemployment rate declined to 8.1% due to a significant number of people no longer seeking work.  In response to the poor report, the major indexes were in the red across the board with the S&P 500 dropping 1.6% for the day.  Also in response to the negative report, the yield on the 10-year Treasure note declined from 1.93% to 1.88%, and the price of oil dropped to its lowest level in almost six months.    

            Obama’s 2012 campaign had been shaping up very well before yesterday with a cornerstone of his campaign being the recovery in the US economy since his election to office in ’08.  However, Friday has brought doubt on whether the United States really is in a recovery at all.  In response to the report, Roger Altman of Evercore Partners said, We need 200,000 to 250,000 jobs to really make this, or to illustrate that this is a healthy and strongish recovery.  We’re nowhere near that.”  Expected Republican nominee Mitt Romney has already turned the report into campaign material.  In reaction to the report, he said, “This is way, way, way off from what should happen in a normal recovery.  We see to be slowing down, not speeding up.”  Also in response to the report, the Obama campaign has tried to emphasize the private sector’s feat in adding jobs for each of the past 26 months.    

            The quick reactions by both parties make it clear that the economy will be the foremost issue in the 2012 election.  The more negativity there is surrounding the economy in the next few months, the greater the chances of President Obama losing the election.  Psychologically, this should prove a very strong position for President Obama.  His reelection appears aligned with the incentives of all Americans to have a stronger economy.    

-Kyle Cameron

Alternative IPOs: Rethinking Capital Raising

           With all of the news surrounding recent IPOs like Groupon, Yelp, and Facebook, it is easy for us to forget the larger picture:  There are significantly less IPOs now, then there were 10 years ago, and the market for initial public offerings has effectively been slow.  The IPO market has changed in the past decade for a number of reasons.  Most importantly, there are simply less IPO underwriters now than there were before.  Major players in the IPO space such as Hambrecht & Quist; Alex, Brown; Robertson Stephens and Montgomery Securities have either merged or been consolidated into larger banks than focus on larger deals.  This focus on larger deals means those underwriters are no longer interested in the smaller initial public offerings and do not bother doing investment research on small-cap companies.  We can see this shift to larger deals clearly.  In the 1990s, the average deal size for a NASDAQ IPO was $35 million, while in 2006, this figured ballooned to $115 million.  Additionally, the average market cap for these companies went from $55 million in the 1990s to $330 million in 2006.  Today, the IPO market has no interest in companies that are strong and growing but could be valued at less than $250 million.

            The inability go public to raise equity can prove quite a challenge to these small but growing companies.  Luckily, however, there is an alternative – aptly named, an alternative IPO.  In an alternative IPO, a company often completes a reverse merger and uses PIPE financing.  In a reverse merger, a public entity “acquires” the stock of a private company in exchange for about 90% to 95% of the shares of the public entity.  The newly merged company then takes on the name of the private company and installs the private company’s management. 

            Once the company has effectively gone public through a reverse merger it often uses PIPE financing to actually raise the capital it seeks.  A private investment in a public entity (PIPEs) is typically structured to allow an investor to purchase stock at a discount to the market price making it often highly lucrative for investors.  Furthermore, the speed of PIPE financing makes it highly desirable for the companies.

            In an always-changing market, we need to understand some of the underlying market dynamics.  Alternative IPOs provide an intriguing opportunity for both companies and investors alike. 

-Kyle Cameron

Playing the Prediction Markets

We have markets to trade thousands of stocks, bonds and derivatives, but Intrade is taking ‘market making’ to a whole new level. Intrade allows people to play the prediction markets, in which you buy or sell into hundreds of real world events. Instead of searching for a company’s intrinsic value, an investor in the prediction markets is simply finding the probability of an uncertain future events from occurring. Some examples of markets include Barack Obama being reelected or the Avengers grossing over $175M in its opening weekend. Markets are always defined on a yes or no basis, such that you buy shares of an event you believe is going to happen and sell otherwise. If the event does happen, then the market is settled at $10 and if it does not then it is settled at $0. The idea for this range being that a market price of $4 indicates a 40% probability of the event actually occurring.

The evolution of prediction markets brings the world of investing and trading to an entire different audience. While once only those knowledgeable in finance had the skills to accurately price a stock or option, now any avid American Idol watcher can bet on the next winner or any keen physicist can bet on the Higgs Boson particle being found before December 31, 2012. Further, if there are no markets of which you are familiar with, you can easily create one. However, the large problem with such an unregulated market is the even larger information asymmetry. While you may track all the news and research developments coming out of CERN and make your bet on the Higgs Boson, there’s nothing stopping an actual CERN scientist involved in the project on putting money on the same outcome- bringing insider trading to an entirely different level. Beyond that, since there are only 82,000 users in the Intrade platform, liquidity becomes a big issue and an individual may actually be able to move markets if they invest a moderate amount of money into an outcome. Whether there are controls in place for these kinds of behaviors is either unknown or very vaguely stated on the website, but regardless good things to think about before putting your savings on the probability of NASA announcing the discovery of extraterrestrial life by the end of the year. 

-Vivien Sung

Spaniards in Search

While landing an internship here at Stern may be difficult for some, things aren’t as bad as they seem. The majority of us do find somethingpost-graduation, somewhere in the U.S. However, the same cannot be said for people aged 25 and under in Spain. Statistics show that over 50% of this demographic are unemployed. The reason for this is the end of Spain’s construction boom, where many teenagers found and eventually lost their jobs.

The major problem is that many people in this demographic had left school early to take advantage of the abundance of construction jobs so they are now left without an income and without a degree. Moreover, some are graduating with degrees but are still left unemployed. Companies also have little incentive to hire young workers as the older employees have more experience in the field. As a result, experts estimate that around 500,000 young laborers will leave the country every year until 2020 just to make a living.

The most popular destination for new jobs for Spaniards is Mexico. There are some that argue that the young workers can learn a lot from being abroad and bring new skills back to Spain in the future, but I see a new problem arising. Despite the decrease in illegal immigration from Mexico to the U.S. in recent years, the increase in Spaniards could saturate the job market in Mexico and could potentially rekindle our immigration problem. But as our economy picks up and more and more positions become available, illegal immigration might not cause such an uproar and hopefully will be a thing of the past. 

Yelp Profits But Shares Drop

Yelp is down 8.% after being one of the best IPO performers this year. Even though the company beat revenue forecasts, it is clear that its operations are profitable. Analysts still aren’t’ convinced by Yelp, even though Yelp has had fourth straight quarter of revenue increases. Will Yelp be able to beat competition coming from Google? While its revenue is increasing, it is not profitable and the competition from other companies such as Google is increasing. Google recently bought Zagat, a fancier review competitor. And Yelp also gains most of its traffic from Google itself, so if Google heavily promotes Zagat, Yelp’s consumers group could be at risk. Yelp clearly needs to be able to innovate and set itself apart from the Google powerhouse in order to maintain its advantage of its competition. As the leader currently, they should be able to maintain their consumer base for a while because they are so heavily consumer focused, with their consumers providing reviews.

While many technology companies have outstanding IPOs, it seems that many are not able to maintain their success or convince investors that they will be sustainable and profitable in the long run.

-Evan Wang 

UK in Recession

Both UK manufacturing and UK service firms growth have slowed down in April. Export orders fell in the U.S., euro zone, and Asia for the UK manufacturing group, but employment for both the services industry and the manufacturing sector grew in April. The slowing of manufacturing growth will probably continue to slow even further with the infrastructure for their 2012 Olympic Games being completed and as the Olympics draw closer. However, not only the UK faltered though, as the Eurozone saw manufacturers decline throughout; Spain and Italy’s manufacturing are under the pressure of huge debts and decreasing orders. However, in Asia there has been increased production to meet growing demand, and the growth of U.S. manufacturing has increased as well, so it seems that the debt crisis in Europe is severely dampening its growth. India, South Korea, China, and Taiwan’s growth this month showed stronger manufacturing activity.

The Bank of England says that this year Britain’s economy should start growing this year, but Britain is back in recession because of two consecutive quarters of negative growth. GDP has shrank by .2% in this quarter, and Britain hopes for Eurozone stability in order to regain confidence among businesses and households.

-Evan Wang

Chinese GDP-Stocks Market Paradox

Everyone knows that China has one of the largest gross domestic product growth rates, but is everyone aware that the Chinese stocks actually do not match up with these rosy growth rates?

The Chinese securities regulator announced new stock listing rules over the weekend as it tried to end a decade of lousy stock returns.  There seems to be paradox common to most emerging markets, that the high GDP growth often carries an underperforming equity market with it.  For example, China’s 2011 GDP was four times its figure in 2010; however, the Shanghai Composite Index only rose about 46% over the past decade.  Why is this happening?

First, China’s stock market is not mature enough.  In fact, it was only established two decades ago, so we cannot expect it to behave like other long-established markets in developed countries.  Second, as with many developing countries, there is the problem of legal and political problem, i.e. corruption.  A 2002 study of China’s stock market by Dow Jones Indexes highlighted the problem of insider trading in China.  Investors who could gain in the Chinese stock markets used to be the powerful ones who could obtain state-critical information before the public.  Now, with the securities regulator’s vow to destroy all insider trading, reform IPO system and introduce more institutional investors, we hope to see the Chinese stock market mature soon and become another exciting hub of investments.

~Sophie Tam

Diminishing Hope for Sarkozy's Reelection

Sarkozy, the first incumbent not to win in the first round since 1958 must gain the support of over half of the radical right in order to win, while Hollande must make up for a generally poor showing for the left where communist Jean-Luc Melenchon only gained 11.1 percent of the vote. Surveys predict that Hollande will beat out Sarkozy by a 56 percent to 44 percent margin in the next round.  To secure the remaining votes which once belonged to Ms. Le Pen, the elections will have to veer to the right, reflected in Sarkozy’s repeated appeals to anti-immigration and France’s historically Christian values.  However, if projections are true and Holland wins by a ten point margin, it would signal the first Socialist president for France since 1995.  Hollande’s victory has already increased uncertainty in markets as he pledged to boost government spending and cut French debt along with a 75 percent tax on the wealthy.  Additionally, while German Chancellor Angela Merkel and Sarkozy have recently introduced a treaty on budget austerity, Hollande would amend it to include economic growth on top of the cost-cutting.  Although Hollande claims that Germany is taking his advice and reducing its austerity, investors are still worried that a shift in power may cause a rift in the Eurozone. What is certain, however, is this projected victory displays that Sarkozy’s ideals will become a thing of the past as critics say that extreme right policies will sacrifice the European unity that World War II was fought to establish.  

-Jesse Chai

Bright Food's Acquisition Spree

A $1.94 billion deal has allowed China’s state-owned Bright Food to have majority stake over British cereal maker Weetabix Food. Bright Food will buy a 60 percent stake in Weetabix from the private equity firm Lion Capital LLP while Lion Capital and Weetabix management keep the remaining 40 percent. Bright Food has previously attempted to expand overseas, but has failed many bids for major corporations such as Yoplait, United Biscuits, CSR’s sugar division, and GNC. This venture is its largest overseas deal yet and its second overseas acquisition this year, after its 75% stake in Australian-focused Manassen Foods Australia purchased from Champ Private Equity in August. Bright Food had a focus on acquisitions even within China, and they plan to continue their growth through acquisitions abroad.

Bright Food is China’s leading food group, and is aiming to acquire sugar, wine, and dairy assets abroad. Its goal to become the major global foodmaker is supported by the Shanghai government, which encourages Bright Food's foreign acquisitions. Because Bright Food doesn’t currently make cereal, it aims to bring the Weetabix brand throughout China and overseas to make it the dominant brand in Asia. Bright Foods plans to increases foreign sales from 5% of revenue to 30% of its revenue in five years. If Bright Food is able to continue acquiring foreign companies and using its distribution network to introduce new goods throughout China and internationally, Bright Food will definitely benefit from these acquisitions. China’s booming middle class is spending more and more money on groceries, with over $970 billion spent on groceries in 2011, and many Chinese will definitely need a delicious breakfast!

-Evan Wang