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GM Pokes Facebook in the Eye -- Why?

NEW YORK (Real Money) -- Tuesday's news that General Motors (GM) is cutting ad spending on Facebook (FB) was a huge shock to most casual investors. The concern among Facebook skeptics is whether GM is the canary in the coalmine leading other big ad spenders follow suit. Facebook has tried to spin this development by countering:

  • GM was only spending $10 million a year.
  • Ford (F) is happy with its return on investment, so GM must be doing something wrong.
  • The timing of the leak to the Wall Street Journal implies it's coming from someone trying to embarrass Facebook.
  • It's still early for ads. Facebook is not even trying and posted $3.7 billion in revenue last year. Imagine what it can do when it gets its act together.

All this is true; however, is it still cause for worry? Of course it is. GM is a huge advertiser. Something is wrong if Facebook is arguing that GM is too stupid to advertise on its website.

It's also puzzling that GM spent $30 million in the past year on agencies to help do its "free" Facebook site, but only spent $10 million on Facebook itself.

Maybe Facebook will start charging companies like GM to do this, thereby transferring agency revenues into Facebook's coffers.

Maybe. But why hasn't it done that already? Because Facebook wants to get people hooked and not try something instead of Facebook.

So what does this mean for Facebook's debut Friday?

It should take a little air out of the tires. I heard someone comment two days ago that this IPO could touch $200 billion. I don't see that level of exuberance.

Even if Greece continues to get all the business news headlines and now with this GM news out there, I don't expect the people who want to buy Facebook to be deterred. In their minds, Facebook is still at the beginning stages of a huge run and the best time to buy is right at the start.

I believe we're still going to see the deal price at a valuation of about $120 billion Thursday night and trade up to $150 billion Friday but close at around a $140 billion valuation, representing a first-day gain of 17% -- slightly less than Google's (GOOG) 18% IPO gain.

The world will be watching.

At the time of publication, Jackson had no positions in the stocks mentioned.

Eric Jackson is founder and Managing Member of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. In January 2007, Jackson started the world's first Internet-based campaign to increase shareholder value at Yahoo!, leading to a change in CEOs in 2007. He also spoke out in favor of Yahoo!'s accepting Microsoft's buyout offer in 2008. Global Proxy Watch named Jackson as one of its 10 "Stars" who positively influenced international corporate governance and shareowner value in 2007.

Prior to founding Ironfire Capital, Jackson was President and CEO of Jackson Leadership Systems, Inc., a leadership, strategy, and governance consulting firm. He completed his Ph.D. in the Management Department at the Columbia University Graduate School of Business in New York, with a specialization in Strategic Management and Corporate Governance, and holds a B.A. from McGill University.

He was previously Vice President of Strategy and Business Development at VoiceGenie Technologies, a software firm now owned by Alcatel-Lucent. In 2004, Jackson founded the Young Patrons' Circle at the Royal Ontario Museum in Toronto, which is now the second-largest social and philanthropic group of its kind in North America, raising $500,000 annually for the museum. You can follow Jackson on Twitter at www.twitter.com/ericjackson or @ericjackson.

You can contact Eric by emailing him at eric.jackson@thestreet.com.

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