A lot of money
23 May 2012, 10:24 AM
So here’s what I don’t understand about the Facebook IPO (Well, here’s the part that I don’t understand that I actually care about slightly, unlike the part where some rich people get richer and others inexplicably don’t): what’s it all for?
As I understand it, the point in a capitalist system of having markets in stock and shares is to raise capital. If my widget factory needs upgrading, I need capital to upgrade it, and while sure it would have been nice if I had set aside a portion of the revenue every year into a capital account for that purpose, that would have meant less money for me to spend on stuff, and that didn’t happen. So now I need capital. One option is borrowing from the moneylenders, repaying it later with interest, and then not being in debt any more and keeping the added revenues from the upgraded widget factory for myself. Or putting then into the capital account, I suppose. So: moneylenders is one option, if they will lend. There is risk there, though, as if I can’t pay back, I lose everything.
Second option is taking on a partner who has some capital lying around, a capitalist who is looking to invest, and that’s awesome, because any risk gets shared with the investor. The drawback is that my new partner gets a share of the profits. Also, I have to find one.
So instead of finding one partner, I find a bunch of partners and sell each of them shares, as many as they want and can afford. This would be insanely complicated if we didn’t have a mechanism for doing it, so we made a market exactly for this sort of thing. Hurrah! So if I need a million dollars, I can sell half a million shares at two dollars each, and keep half a million shares for myself, and I’m done.
Of course, all my new partners may want to share in the profits, too, but (a) there’s a mechanism for that, and (2) it’s evidently possible to train all those shareholders to only care about the profit from selling, not from holding. So the only downside is that at any moment my million partners are crazy people who have no interest in the long-term, haven’t been my partners for long, don’t know anything about widgets, and could not conceivably care less. It’s win-win!
But seriously—the market makes some sense to me as a way to gather together a thousand tributary streams of money into a mighty river of capital. And if that river runs dry, the widget factory doesn’t get upgraded: I do understand that. I am a socialist, and I view capital with extreme suspicion, but I do understand that it serves a purpose. Like fire, capital is a dangerous but necessary servant, and a catastrophic master. So is a machete. Don’t want to live in a world without machetes, but I want to make sure they stay where they’re put.
What is the widget factory upgrade that Facebook needs those billions of dollars for? The exact numbers aren’t clear, but if the total value of the stock is fluctuating around one hundred billion dollars, given that they spent some billions of dollars setting it up and that the people who owned shares of Facebook last year still presumably own half of it without putting more money in, that’s still, well, unless I am making some fundamental mistake, what happened in the last week is tens of billions of dollars being transferred from investors to Facebook, in exchange for the stock. Right? Thirty, forty billions? What is the plan for that money? What could Facebook possibly require thirty billion dollars in capital for? I mean, that’s a hell of a server farm.
Tolerabimus quod tolerare debemus,