Figuring Out The Real Flaws With Facebook’s IPO

           When it comes to Facebook’s Initial Public Offering (IPO), it seems like there are more people to blame than the 900 million active users who use the social networking site. Investors have faulted lead underwriter Morgan Stanley for originally pricing the Facebook’s stock at $38 per share - especially after the firm learned that Facebook first quarter profit numbers in 2012 were lower than its fourth quarter profit numbers in 2011. Morgan Stanley placed blame on Nasdaq, the exchange where Facebook shares are traded, for the technology problems that led to an “unprecedented confusion and disarray” and resulted in a 30-minute delay of the IPO. Venture Capital firm Kleiner Perkins Caufield Byers said that Facebook shares trading on SecondMarket, a stock exchange available for private companies, before the IPO valued the company at $104 billion. This means Facebook’s shares would cost the equivalent of $48.64 per share given the amount of shares made available during the IPO – 22.2% premium over the $38 per share price during the IPO.

            For all of the negative criticism of Facebook’s IPO, there is one point that has been largely missed by most journalists and commentators. From a financial perspective, the IPO could not have gone much better for Facebook. Firms really have only two sources when it comes to raising new capital for its business – equity and debt. Equity capital means that outside investors are taking ownership stakes in a company (usually in the form of stock) in exchange for providing money. Current equity owners want new investors to provide as much capital as possible for as little of an ownership stake as possible. This causes the smallest amount of dilution of current ownership stakes and makes it easier to raise money in the future. 

Facebook’s IPO meant that new shareholders were going to provide Facebook with cash in exchange for the ownership in the company. Once Facebook sells its shares to new investors after the IPO then it receives the money. The company no longer receives money from any future stock transactions that occur on the Nasdaq unless the company issues new shares after the IPO. If a stock declines in price after its IPO then the company received more money at a higher valuation than its market value – a good thing for the company.

Yet, IPOs are not traditionally considered successful unless the share price increases in the days after a company goes public. The main reason for this is that the investors who buy the IPO – especially large institutional investors like state pension funds or insurance companies – lose money if the stock price declines in value. In addition, most news coverage about publicly traded companies centers on their stock price. When a stock price decreases immediately after an IPO, investors and the media consider the company to have significant problems resulting in significant negative media coverage. Therefore, companies often undervalue their IPOs to get the initial “pop” of their stock even though that means firm receives less money from this transaction.  

Sports organization should take note of what happened to Facebook during its IPO. Facebook obtained an outcome in its financial best interest but has been slammed by the media and critics because of the decline in the stock price after the IPO. More and more sports organizations are using techniques that would increase their performance both on and off the field in ways that break with past practices in the sports industry. In fact, B6A service offerings are designed to help sports organizations enhance their sponsorship, marketing, and analytic capabilities in non-traditional ways.

Solely examining the quantitative results, however, without having the proper qualitative analysis or communication strategy can prove to be a disaster for an organization. In Facebook’s case, the company should have anticipated its shares to decrease after its IPO especially given its quarterly decline in profits. Yet, it appears the company was not prepared for the backlash that occurred even though companies that had similar declines in their IPO prices faced the same type (if not the amount) of scrutiny.  

From a sports perspective, an organization that had a similar predicament to Facebook is Italian Serie B team Triestina. For years, it tried numerous promotions, marketing campaigns, etc. to attract teams to its 32,000 seat stadium but average game attendance remain around 5,000 fans. In addition, the team makes 70% of its revenue from its television contract with Sky Italia. Therefore, Triestina decided to cover its empty seats using vinyl tarps that were painted with fans. This would make the stadium appear full and enhance the television viewing experience (as television viewers like stadiums that appear full). This move makes sense from a financial perspective as the team was making a decision that impacted 70% of its revenue. The team never really explained this decision to its key audiences before placing the tarps on the seats of the stadium. Instead, fans, the media, and sponsors attended the game and were confronted with the tarps during a game and were justifiably angered at seeing fake fans in the stadium. Only after receiving criticism did Triestina try to address its use of the tarps with significant damage done to its brand. 

A few weeks ago, it would seem odd to say that your company does not end up like Facebook. Yet, Facebook’s flawed IPO should provide a good lesson to sports managers. Good analysis will not always be in line with popular perceptions. Identifying and anticipating reaction when this occurs is critical to avoiding a communication and brand crisis.   

Making Sense Of Military Sponsorship Spending

            An article in today’s USA Today highlights a new amendment to the annual $608 billion defense appropriations bill that would eliminate $60 million in spending on “professional or semi-professional motorsports, fishing, wrestling or other sports." Rep. Betty McCollum and Jack Kingston, the amendment sponsors, said that the sports sponsorship did not generate enough value for the government. Kingston reasoning for eliminating this spending is “"I think that [NASCAR] have been maybe touchy-feely or anecdotal in terms of, 'This is great because the people that go to these events are the type that like to join the Army and very patriotic. There's no metrics at all. When you're in debt the way we're in debt and the military budget is one of the big three — health care and retirement being the others — you've got to look at it with a lot of scrutiny.”

            This not the first time politicians have zeroed in on sponsorship dollars as a form of wasteful spending. At the height of the financial crisis in 2009, then Rep. Barney Frank stated, “I don’t think anybody has ever opened a bank account or decided to buy a CD because a bank’s name is on the stadium.” Just because Congress has been examining this issue for a long period of time, however, does not mean that it is right (this concept will be a big surprise to most readers). We would disagree with both Kingston and Frank on their assessments of sports sponsorship.

              Kingston first statement about NASCAR and other motor sports organizations only having anecdotal evidence to support the claims of delivering value to sponsorship is unlikely to be correct. One of, if not the, primary source of revenue for both NASCAR and it’s individual teams is sports sponsorship. Since the government is estimated to spend have its sponsorship dollars on NASCAR (approximately $30 million), we find it extremely unlikely that organization would not provide the government with any type of data or ROI metrics it would need to show it received value.   

            Frank’s statement is also misguided. Building brand awareness and establishing positive brand association is key element of any company’s marketing mix. In addition, males 18-34 are notoriously difficult for entities to reach using traditional marketing channels. Sports organizations provide a large number of impressions to a lucrative demographic with high discretionary spend to their corporate partners. To be fair to Frank, there can be better ways to activate a sponsorship than arena or stadium signage. Yet, signage is usually only part of a larger sponsorship used to attract potential clients. Being able to target customers in multiple channels using multiple different methods within a sports sponsorship deal provides companies with the best opportunity to generate new revenue.

            Yet, there is a bigger problem that Kingston and Frank statements and actions present to sports organization. There has long been a perception that sports sponsorship spend does not deliver tangible ROI to corporate partners. Kingston and Frank’s sentiments reflect that there is popular (and likely Congressional) support for this view. After all, Kingston is from Georgia. Why would he attack NASCAR when many of his constituents are NASCAR fans?

            More importantly, if politicians are making these statements based on their perceptions, it is not long before other corporate partners may make similar assessments to their sponsorship. Therefore, it is critical for sports organizations to be able to provide tangible and direct evidence that shows their corporate partners how it does deliver quantifiable value for sponsorship spend.

            Block Six Analytics provides the tools to make this happen through our Partnership Scoreboard™ service offerings. We work with sports sponsorships to identify how exactly corporate partners’ sponsorship spend will generate new revenue and meet marketing goals. In addition, corporate partners can track their valuation information throughout the course of a season or a year through our web based application. This increased transparency and accountability directly addresses the issues and concerns of politicians and corporate partners. Sports organization’s can no longer afford to not provide quantitative data to their partners or they run the risk of what is happening to NASCAR and its government sponsorship. 

Mel, McShay, and Mayock Makes As Many Mistakes As You and Me

        PunditTracker.Com recently ranked the three most famous NFL draft prognosticators – Mel Kiper, Jr., Todd McShay, and Mike Mayock – on their individual “mock draft accuracy”. To accomplish this goal, PunditTracker “use[s] a variability measure based on the difference between when each player was projected to be picked and when he was actually picked.” This means that if a player was projected to be the 15th pick in the draft and ended up being the 20th pick in the draft then the variability measure is five. After completing this analysis, PunditTracker found McShay to be the best predictor of where a draft pick would be selected for the fourth year in a row.

  There are a couple of issues with measuring the success of the prognosticators in this manner. The first is does anyone, outside of the draft picks and their agents, really care what number players are selected in any draft - especially the second after the draft is over? Quick, try to name all of the top-ten picks in order of this year’s NFL Draft. We are willing to be that most cannot complete this task nor do they care to try.

  The second issue is that PunditTracker.com should really be rating the prognosticators on the performance of the picks after they are selected and not where they are drafted.  Each of these prognosticators rates prospects both before after the draft – with teams often receiving grades for their selections. PudnitTracker.com could have evaluated how Kiper, McShay, and Mayock’s draft grades / assessments matched with players actual future performance in the NFL. This would likely be the assessment that executives, coaches, fans, and players would be more interested in when evaluating prognosticators and not where players were selected.

         It is possible that this analysis has already occurred and we would be happy if someone would sent this to info@blocksixanalytics.com. However, we are comfortable stating their predictive capabilities of Kiper, McShay and Mayock are no better than the experts in many other fields – very poor. In his book The Wisdom of Crowds, James Surowieicki shows that experts constantly and consistently are very poor predictors of future performance or behavior. In fact, he shows that crowds of people with limited knowledge of a certain fields are often better able to make decision than experts. For example, Surowiecki shows that a few hundred amateur participants working within the Iowa Electronic Markets project at the University of Iowa have more accurately predicted the outcome of election results than Gallup Polls have done in 1990s and early 2000s based on their trades of political campaigns' "stocks".

        For the sports organizations, this is a particularly troubling finding. It is hard to find an industry that spends more money, time, and energy in its scouting / player development operations. For example, McShay, Kiper, and Mayock are just one of hundreds of general managers, scouts, assistants, etc. who have watched thousands hours of game film, attended hundreds of games, completed numerous interviews, etc. with draft picks to determine the future professional performance of amateur players. More importantly, professional sports teams annually pay draft picks millions of dollars to players in a variety of sports base on the ability of their experts to predict future performance. Even with all of these resources spent on evaluating college and high school players, drafts in virtually every sport are often called “inexact sciences”. This is a nice way to say that teams are wrong a large portion of the time when it comes to selecting players based on their expected future performance. Virtually every fan of a professional sports team can point to a time a team spent millions of dollars on a draft pick and receive bubkus in return (and bubkus is an “official” B6A term for zero).

        All of this should lead to a natural question - Why are sports organizations paying so much money for experts in player evaluations if it is so difficult to predict future performance? In addition, what is really the value of relying on “experts” like McShay, Kiper, and Mayock if they are wrong so much of the time? McShay and Kiper in particular have rose to prominence for doing something (predicting the success of future draft picks) where they are no more likely to be successful than a group of “average” people sitting in a room making the same evaluations.

         Instead, sports organizations can change their approach when dealing with experts and their drafts. There does exist a large amount evidence that experts are really good (and much better than amateurs) at dissecting situations that have occurred in the past. Having experts evaluate where and how teams may have made mistakes in their drafts would likely be extremely valuable to sports organizations. When it comes to the draft, teams would likely be as well, if not better, served creating markets where their fans could vote, trade, and/or “bid” on players in a particular draft. If nothing else, teams definitely need to consider shifting money away from scouting operations because predicting the future is really, really, really hard.