Wednesday, March 26, 2014

Another Convertible Appeal To Mark Zuckerberg

Dear Mark,

I tried a couple of weeks ago to get you to issue the biggest convertible bond ever to help you buy companies. My editors got a little upset when I jokingly suggested you buy my new company at the kind of valuation you're paying for hot new technologies, many of which are in no foreseeable danger of making money.  They said it distracted too much from the point of the article, which was that Facebook should be the company to do a landmark convertible.

So I wrote another piece talking about how you and Ken Griffin, both Harvard guys, should get together and talk about how Facebook should do the biggest convertible bond ever. Ken, after all, became a billionaire through his convertible prowess. You might say he's the Mark Zuckerberg of convertibles. Or you're the Ken Griffin of the Internet. Or something.

Here's the thing, Mark: it's clear that you're going to be doing a lot more shopping. And there are really only two things you can use for currency: cash and Facebook stock.  You used both of them, mostly your stock, to pay for your newest acquisition, Oculus.

English: Mark Zuckerberg, Facebook founder and...

Mark Zuckerberg, Facebook founder and CEO, during his European Tour. (Photo credit: Wikipedia)

I'm sure I don't need to explain to you, Mark, that the cost of using cash for a deal is the opportunity you have to give up, the other thing you could have bought instead. Clearly this is less of a problem for you and Facebook than it is for most of us. But even you guys have to make decisions.  Even you guys don't have infinite resources—of cash, stock, time or anything else. I think that's what the stock market is trying to tell you today. And even though you may not care, let's make no mistake: you do run a public company, and that makes you responsible to your shareholders.  That doesn't mean you have to worry every time your stock bobs and weaves, but it also doesn't mean you can ignore the people who are, in a real sense, your bosses now.

So let's look at another way you might have paid for Oculus. Let's say you issued a $2 billion convertible bond. I'd be willing to bet you could get terms as good as anyone—these days, they seem to max out at a 0% coupon and a 50% conversion premium for a five-year bond. Based on yesterday's close, that 50% premium would have gotten you to $97.33. Darn, so close to $100. But you know what, Mark? I bet you could have gotten a $100 conversion price yesterday.  Because your stock is volatile, and your company is so well known and (presumably) creditworthy, the convertible market would treat you like, well, like Mark Zuckerberg.

So let's say you did that. You raised the $2 billion to pay for Oculus with a 0% coupon with a $100 conversion price. That means that you would have done one of two things—you would have either gotten a five-year free ride on the cash, or (if Facebook stock does well) you would have effectively have paid for Oculus with $100 shares instead of $65 ones. Put another way, instead of having to pay with three shares, you could have bought the company for two.  And if you just went out and borrowed the $2 billion, well, I'm sure you could get nice terms—but I'm even surer the money wouldn't be free.

Why do I keep bugging you about convertibles, Mark? Well, maybe a little bit of it is for old times' sake, when I think back to the times I would tell your father about the convertible market during the pauses while he was jamming metal instruments into my mouth and telling me I needed to floss better.

(Actually, that was usually his assistant). But that's not the real reason. The real reason is that I'm kind of a modern-day yenta, Mark. I like to connect people with one another, and I also like connecting companies and markets that need each other. The convertible market needs new issues, and it's more than happy to lend money on terms I think you'd really like, to make it easier for you to buy the technologies of the future.  If you don't believe me, Mark, keep reading this space: in the days to come I will tell you about some convertibles whose prices show just how hungry investors are for paper.

One last note, Mark: As I mentioned the other day, if Apple Apple hadn't issued a convertible back in 1996, Steve Jobs might not have gotten the chance to do his second act.


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