Facebook IPO: The Big Short

Many years ago, when I was an intern for Sony Electronics’ law department, I remember getting an email from then-CEO Howard Stringer(‘s secretary, most likely). In said email, he tried to spin cutting 16000 jobs in a positive light. Closing plants in the US were necessary evils and action now would lead to less layoffs in the future. Sony tried to get in front of the situation.

The email was troubling, and I wanted nothing more than to run away from the situation. At the same time, experienced lawyers were being given early retirement documents, with the hope that enough would accept the deals. The two lawyers who I worked under in 2008-09 accepted the deals, along with many of their coworkers.

I remember reading those emails and recognizing how shitty the leadership was at the time. Stringer was never upfront about the challenges.It would be impossible to grow under his leadership.

Looking back, I tried to remember what the best Sony release has been since 2008. It’s been about three and a half years since I started that internship, and I cannot remember a product that had positive reviews. Neither can the internet, actually. Sony misfired with the Playstation 3 for the most part and let its Reader flounder and ultimately fail once e-readers were taking off. Amazon wants to say thanks, Stringer. The Sony Reader was once Amazon Kindle’s biggest competitors.

The problem was, Stringer couldn’t lead this company to where it needed to go. He was a soldier and fought for this country in Vietnam, and should get respect for that. He also was great for CBS before coming to Sony. He just wasn’t meant to be a CEO and had no business leading the company. I don’t know why it took so many failures and such stagnation to realize that, but Stringer finally stepped down. The company filled Stringer’s vacancy with Kazuo Hirai and cut 100 more jobs. Sony was once an electronics giant. Stringer led it down an alley and beat it with a baseball bat. And he got paid millions to do it.

What does this have to do with Mr. Zuckerberg and Facebook’s IPO? The same way that it had to do with Google being forced to hire Eric Schmidt to be CEO before its IPO. It’s all about leadership.

Schmidt brought experience and levelheadedness to Google, something investors looked for in a company that was, at the time, new and receiving a pretty high P/E ratio. Google had a ton of potential, but early investor Sequoia Capital recognized that it would not be well-received under the leadership of founders Sergey Brin and Larry Page. No offense to them, but they didn’t bring the clout that Schmidt did.

And talks have always surfaced about whether or not Zuckerberg would receive the same fate. The Facebook founder (or co-founder) has been seen as slightly rash and abrasive, especially in the wake of the movie ‘biography’ The Social Network. The problem is, the man has not changed significantly since spite led him to launch thefacebook.com. Sure, sure he’s engaged now and has an adorable dog. And, yes, his enormous social media network got President Obama to do a Facebook townhall at his headquarters—he even dressed up—but he still is growing as a leader. And a $100 billion valuation does not take that risk into account.

Zuckerberg still wore jeans when meeting with the president, and still does cutesy things like manipulating accounting methods to reach exactly $1 billion in profits (cue Justin Timberlake scene). All these things make for a cute story and lots of nice little press releases, but they don’t exactly show someone whose goal is the bottom line.

A lot of press is going to be given to Facebook’s numbers—the stagnating user growth, the tons of employees who will now be decentivized (as opposed to the extreme incentives shares gave them), the dependency on certain companies for profits (Zynga) and the lack of much proprietary in how Facebook credits work. Revenues have increased, but a large portion of that is dependent on Facebook credits rather than advertisement, and credit deals with Zynga and others are set to expire in 2015. Plus there’s the lack of involvement in China, which is seen as both a potential growth opportunity (and reasoning behind a 1000 P/E) and a sign of a company that’s over-saturated in the markets available to it.

Then there’s the ideological perspective of asking that “everyone who invests in Facebook understands what this mission means to us.” It’s cute, but not exactly what you want to put on your S1 filing for your IPO. It’s obviously a landmark day in Zuckerberg’s life, and it’s probably safe to say that “we don’t build services to make money; we make money to build better services” was meant with the media and average person to read, rather than large investors.

But all that being said, trying to defend Facebook as a bullish play this early in Zuckerberg’s maturation process as a leader is somewhat overzealous. Zuckerberg is the perfect man for Facebook the private company, but every move he makes and everything he says will be more scrutinized in the public forum. He will have his growing pains as a leader and will have to get some time in before he can mimic Steve Jobs—who, let me remind you, caused enough problems to get fired. In a time when, somewhat ironically, nothing is personal due to social media, Zuckerberg will have to manage himself accordingly. That’s not going to be easy.

Zuckerberg has taken Facebook to the next level and is definitely deserving of all of the money he is set to earn (and get taxed on), but it’s hard to see Facebook actually raising in price in these early stages. After the initial hype surrounding the IPO (and the ‘owning Facebook’ bump), expect Facebook to pull a LinkedIn. It’s hard to legitimize a 1000 P/E, even if you do run the world.

How Greg Schiano Saved the Big East

Image

In one of the less-classy events in recent college football memory (Urban Meyer’s blatant thievery in recruiting aside), Greg Schiano left Rutgers University’s football team for ‘greener’ pastures in the NFL. By becoming Tampa Bay’s new head coach, Schiano will be tasked with bringing consistency to the franchise and getting the most out of players who seemed to give up at certain points last season. Schiano leaves Rutgers in good shape institutionally, having brought the team to respectability in the Big East. Despite a slight decline after an 11-2 2006 campaign—which culminated with current Raven’s running back Ray Rice dominating Kansas State with 170 rushing yards—Rutgers seemed to be putting pieces together.

The puzzle pieces were finally being put together, as the coach was finding a way to get New Jersey recruits to stay within the state and even using his Florida ties to get mid-class recruits to think about moving north. In a huge and relatively untapped New York market, New Jersey natives could see the potential. Then, with rumors swirling about a Tampa Bay Buccaneers flirtation, Schiano left his assistants high and dry. Waiting for the coach to show up to a Don Bosco High School–ESPN HS #1 high school team in the country–recruiting event, Schiano’s assistants had to learn from reports that the coach was taking his talents to South Beach’s short-bus riding step brother.

The move was, to put it bluntly, a bitchy cop out. A New Jersey native, I was livid when I heard former Pitt coach Todd Graham told his team he was leaving via text message. The idea that Schiano wouldn’t even bother to notify his assistants shows a lack of character. The coaches, whose livelihood is based on Schiano being the head coach, sat around like stooges attempting to defend the man who just left them behind. According to the ESPN report, the coaches were “shocked” that Schiano was late and defended it as “Schiano might have gotten caught up in another meeting.” They were right about the meeting, but came off as fools to the students they were trying to recruit when Schiano’s decision to leave became official.

Schiano screwed his own coaches, and this would probably have focused more on a lack of respect and honor—something teams should look for in their coaches—among the rank of college and professional sports. You cannot fault Schiano for making the move, but you can fault him for how he went about doing it.

Rutgers found a way to keep most of their recruits, however, and therefore this story has a neither-happy-nor-sad ending. Rutgers went ‘safe’ and promoted one of Schiano’s assistants to head coach. In hiring Kyle Flood, Rutgers went with someone who has understood the program and the recruiting grounds. He ended up losing one player, tight end Michael Giacone to Boston College, despite being screwed by Schiano. ESPN ranks Rutgers’ class as No. 24 in the country, and it is being lauded as the best in school history.

Respect must be given for Flood and his staff, because they worked tirelessly to put recruits at ease and reaffirm commitments. This could have been much worse, and Schiano could have gone down as a college football villain. But it didn’t and he won’t.

Schiano might be recognized as the man who saved the Big East, though. Back in September, it was rumored that the ACC would not only add Syracuse and Pittsburgh, but also look to add Rutgers and Connecticut. At the time, it looked like a near-certainty and a logical move. The addition of Rutgers and UConn would have given the ACC a north—Rutgers, UConn, BC, Pitt, Syracuse, Maryland (I cried a little inside adding them there), UVa and Virginia Tech—and a south—Duke, UNC, Wake Forest, NC State, Clemson, FSU, Miami, and Georgia Tech—for football purposes. It also could have gone with the original teams versus the newbies. Other schools, including Notre Dame and West Virginia, were mentioned, but the two Big East schools were the only ones were flirtation was mutual. Despite the obvious implications on basketball in the conference, Duke coach Mike Krzyzewski promoted a 16-team ACC with, “”Is 14 the right number? Will 16 be? I don’t know if I’m in the minority, majority — I don’t talk to anybody about this — but (it) seems to me that if you’re going to go 14, then you should go 16.” A Blessing from Coach K? Wheels started churning.

Then, the ACC decided it would not expand past 14 teams. Whether it was waiting for the Big 12 to implode or waiting on Notre Dame, the ACC stopped talks and worked around the idea of a 14-team league. The league recently released the template for both football and basketball scheduling.

But expansion has most certainly not died and most likely will never go away. Expanding to 14 teams and receiving re-commitments from current universities, including increased buyout fees, was a method of survival. Re-alignment could have gone wrong for the ACC, with Florida State and others leaving for different conferences. Instead, the conference put its fate into its own hands and decided to fortify itself.

A movement to 16 teams? Well that would just be to make it a power conference. And it’ll come in due time, most likely once the Pac-12 or SEC decide to expand further. And, with a top 25 recruiting class and a beautiful and fertile NYC backyard, Rutgers would be a logical move. Duke already plays at least one game in the area and has a huge base in the city. Carolina blue is a prominent color.

But ACC’s flirtation with Rutgers was in part (a very large part) due to Schiano and his recruiting efforts. Schiano proved that Rutgers was a force. Conference realignment is football-driven, and Rutgers was receiving attention because of updated football facilities and a coach who proved he could get it done.

Flood’s crisis management should be lauded, but that was Schiano’s class. With him leaving, Rutgers doesn’t look as appealing to conferences. With a new head coach coming in, Rutgers isn’t as desirable and probably will not be until Flood proves he can recruit and keep Rutgers at a somewhat high level.

And that time might save the Big East. After scrambling around the scrap heap for college teams, the Big East needs some time to heal its wounds and fortify itself. The conference needs to prove it can still compete and maintain its automatic BCS bid. It’ll need a few years—longer than the 27 months before Syracuse, Pittsburgh and West Virginia leave—and Schiano probably gave them that time.

It isn’t perfect and is silver lining, but Big East officials should send a nice gift basket to Schiano’s new Tampa Bay office. His departure bought them time, and they’ll need every second.

Italy’s debt crisis – the volcano erupts

You’re only as strong as your weakest link. The idea is so simple, and it always pertains to group dynamics. Look at any sports team: the weakest link will always find a way to drive down the rest of the team. A baseball team may have a terrible #8 hitter, and pitchers will use that weakness to get 3-4 outs a game. That’s 11.1-14.8% of outs, a really big deal.

Europe is finding out what happens when you have a bunch of weak links, as the strength of Germany and other Euro heavyweights cannot plug the leaky holes that are the PIGS. They tried to stuff holes with money, which worked well enough. The gaps were small, and cotton is rather absorbent.

With the PIGS floundering but staying afloat, Italy has become the clubhouse leader to go bankrupt. The problem is the hole that is Italy is much, much larger than anything Europe has faced. Reuters is reporting that “the size of the potential bailout for Italy, which needs to repay 326 billion euros in maturing debt only in the next 12 months, is too big to handle for the EFSF.” Italy’s $2.6 trillion debt surpasses that of Greece, Spain, Portugal and Ireland combined (Bloomberg). Unlike those countries, Italy is the world’s third-largest debt market and eighth largest economy. It’s a pretty big deal, even if things aren’t looking so great.

Italy 10-Year Gross Yield, November 9, 2011

That’s what makes today’s news really important. Despite a pledge by Prime Minister Silvio Berlusconi to resign if Parliament passes austerity measures demanded by the European Union, yields on 10-year Italian government bonds crossed the 7 percent threshold to 7.24600. During Wednesday’s trading, the yield reached 7.4 percent, the highest rate since the adoption of the Euro. The rate is up 0.447, meaning that Berlusconi’s decision for a conditional resignation has actually led to more uncertainty and confusion. Further, one-year bills are currently trading around 8.4 percent, more than double the 3.57 percent the last time Italy sold one-year bills on Oct. 11.

Berlusconi will resign, even if the ‘when’ is not yet certain. The resignation is dependent on the passing of these austerity measures, which means there will be plenty of political tussling before anything is passed. It eventually will happen, and Italy will find itself without a leader.

There had been many concerns about Berlusconi’s leadership, as the New York Times succinctly outlined. European leaders questioned Mr. Berlusconi’s commitment to fundamental economic changes and that he no longer had the political power or control of his coalition to deliver on promises of crucial reforms (NYT).

The 7 percent threshold is a huge move, as it is the same level that forced Greece, Portugal and Ireland to seek bailout funds. Italy auctions $6.8 billion of one-year bills tomorrow at 11:00 a.m. in Rome, followed by a sale of five-year bonds on Nov. 14. The problem is they may not find enough buyers in the market after the resignation and the decision LCH, Europe’s largest clearing house, to raise the amount of collateral necessary to buy the bonds (Bloomberg).

Berlusconi might have gotten out at the right time

The only reasonable way for Italy to survive this crisis is for it to receive a bailout from the EFSF, something which one official has stated is “not in the cards.” Instead, he proclaimed, “They will just have to prove that the yields are not justified, because they aren’t” (Reuters). This was echoed by Finnish Prime Minister Jyrki Katainen, who stated, “It’s hard to see that Europe would have the resources to take a country the size of Italy into the bailout program” (Bloomberg). The only other option is for the European Central Bank (ECB) to guarantee Italian debt. The problem with that is the guarantee will most likely hold little to no weight, as the ECB has already thrown Italy under the bus by making assurances that the EFSF will not be able to cover the country’s debt. John Higgins, an economist at Capital Economics Ltd. in London, described the issue at hand by stating, “While Italy is considered too big to fail, she may be too big to save unless there is a major change of attitude towards resolving the crisis.”

A lack of a bailout by the EFSF or another European program will mean Italy will default on its debt and go into bankruptcy. The problem is this doesn’t can an end to the European crisis or some sort of relief for the Germanys and Frances of the world. Instead, the Euro nations’ short-sightedness with regards to Italy will cause a large-scale crisis, demolishing the Euro and the countries and banks that have hoarded Italian debt. Considering what happened to these institutions when Greece was facing possible bailout, the larger scale of the Italian crisis means larger ripples and destruction.

Therefore, if Euro leaders want to act like teenage girls and try to force Italy to learn a lesson the hard way, they are in for a shitstorm of bad results. It isn’t enough to announce that Italy’s debt is too large to cover, or that they have not shown significant enough reform to warrant assistance. Italy needs a bailout, and the Eurozone countries that can afford to take on debt need to start printing money and finding a way.

A brief introduction

It seems somewhat illogical that I haven’t started a blog already, even though my weekly column has served the same purpose for the last two years.

For those of you who have somehow stumbled on this page, I feel it is necessary to introduce myself. My name is Antonio Segalini and I am from East Rutherford, New Jersey. I am a student at Duke University, studying economics, political science and mathematics. My interests include finance, especially trading, and sports. This blog will probably center around those two topics, as I spend most of my time and form most my opinions around them.

I generated a passion for factually based opinion after becoming a columnist for the Duke Chronicle (see: http://dukechronicle.com/users/antonio-segalini). Since most of my columns for the paper will focus on Duke University and related topics, I will try to avoid regurgitation here.

I will try to update this constantly, but will admit that I won’t post generic garbage in order to fill space. There is enough news in sports and finance for me to provide consistent posting, but holding myself to a certain schedule wouldn’t be fair.

Lastly, I want to state some things I’ve done in order to understand how I will approach different issues. Besides being a columnist, I am a member of a business fraternity at Duke, Alpha Kappa Psi. I also am a community consultant, helping work with Durham Public Schools in order to lower their dropout rates. I am a first-generation student, and provide mentorship to other 1-Gs.

I also am starting my own company focused in the realm of an online education marketplace, and once created a non-profit focused on providing at-cost tutoring to low-income families (i.e. you pay for gas and nothing more).

I try to reason through everything, so please be reasonable with your judgments. I will use facts and information to back up any claims, and also try to talk about my life along the way.