It’s a common enough phenomenon in the public markets and, as Facebook shows, it can happen to privately held companies too. On Friday, Facebook said each of its shares would split into five shares, worth one-fifth of its former value. It was a mere formality intended to help bring Facebook’s share price back down into the range of its peers, a move helpful in granting stock units to newer employees.

Hint: More shares don’t make a higher value

This is pretty boring stuff. And yet much of the coverage of the split made it sound like it was magically pumping up Facebook’s valuation. Some sites, which only a week ago estimated the company to be worth $25 billion, now said it was worth $32 billion. That would mark a 28 percent surge in one week, with little news besides the stock split (and David Fincher’s unflattering movie, which certainly couldn’t have helped).

Adding to the speculation about Facebook’s value was Peter Thiel, a board member who said the company was worth $30 billion. Even the Financial Times pegged the startup’s value at $34 billion, based on the prices paid on Sharespost, an online secondary-market for stocks of privately held companies.

I defer to Thiel’s knowledge of Facebook’s financial details. But I also respect common sense, which tells me that a company making $1 billion in revenue this year can in no rational way be valued at $30 billion right now. And besides, valuing a private company is more art than science, a process of building consensus among insiders, outside investors and supposedly independent appraisers. Consider that Google’s underwriters initially valued its 2004 IPO as high as $37 billion. Google debuted a few months later worth $23 billion.

Trading volume is too low to make an accurate valuation

While I also think sites like Sharespost offer a potentially valuable service by facilitating trading of privately held stock, there is a big risk in using their data to value a company. Most of the recent trades of Facebook shares that have been completed have been between $70 and $76 a share, a range that implies a value for the company between $31 billion and $34 billion a share.

But look closely, and you’ll see there have only been ten trades in Facebook’s stock so far this year. Companies can be hard to value in illiquid markets, and one trade a month is more than illiquid — it’s a drought. In such a market, two Facebook shareholders could sell 500 shares back and forth to each other and invent whatever valuation they desired. And nobody would be the wiser.

A legal loophole could create pent-up demand for an IPO

In fact, Facebook shares have been so scarce on the secondary market that there must be a substantial premium to pay simply for the right to own them. This is by design. Back in 2004, Google was pressured to go public against its wishes, in part because of a securities law that required companies with more than 500 shareholders to disclose financial data. Today, Facebook has 1,700 employees. Most of them must hold some equity in the company. But Facebook doesn’t plan to go public for another two years.

Why? Facebook created a loophole in the securities law. It handed out restricted stock units to employees that could never be sold to another person until Facebook was acquired or until six months after an IPO. Then it won the SEC’s permission to delay an IPO as long as those stock restrictions remained in place. Presumably, the few shares you could buy on a secondary market like Sharespost were issued before the restrictions went into place.

This was a cunning move, allowing Facebook to keep private and disclose only the information it wishes to. But one day it could come back to haunt the company. Eventually, employees will demand an IPO so they can cash in on their long-held shares. Then six months after the IPO, when insiders can freely sell shares on the public market, the pent-up demand will be unleashed, driving down the stock price with the sudden supply.

And if that happens, Facebook’s market value could be worth considerably less than $30 billion.

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However, Cisco’s news had that tipping-point feeling to it: Would Silicon Valley — where the rule of thumb had always been high-tech equals low-dividend — start to pay more dividends? Cisco’s news came on the same day that Microsoft said it would increase its dividend from the current 52 cents a year, even if it meant taking on new debt. In other words, Microsoft was willing to pay interest so that it could pay dividends.

That reignited a debate over dividends. Some asked whether it was bad news for investors. Others thought it was a good thing. But it echoed the debate over dividends that has continued for decades. On one hand, shareholders are a company’s owners, so they’re entitled to a portion of the profits. On the other hand, profits are better plowed into creating more profits, which can enrich investors by increasing the stock’s value.

The anti-dividend sentiment prevailed in Silicon Valley simply because, since the late 1970s, tech companies have largely been growth stocks. During the dot-com boom, the notion grew even more deeply entrenched, but as IT spending remains stagnant, the idea of tech dividends suddenly doesn’t seem so absurd. There are a lot of reason why, but two stand out: Tech giants are hoarding cash, and tech giants have very cheap P/E ratios.

Cisco provides an excellent example of both trends. Cisco’s revenue grew 11 percent last year and is expected to maintain that rate this year. Its operating margins are steady around 20 percent. So, while it’s a maturing company, it’s maturing with impressive growth. Yet the price-earnings ratio has been hovering around 16, below the 20.6 ratio for the S&P 500. Other tech giants have been trading cheaply for some time as well, such as Intel, Hewlett-Packard (11) and Microsoft (12).

Meanwhile, these companies have amassed vast piles of cash. Cisco has $40 billion in cash on hand. A 2-percent dividend would cost it about $2.5 billion, or 6 percent of the total. Microsoft has $37 billion. Much of this money is overseas, and subject to currency losses if the dollar gains. The chart from Ycharts shows the different trajectories taken by Cisco’s P/E ratio and its cash on hand.

In the past, tech companies have used cash to expand operations through organic growth or acquisitions, but few want to expand organically when the forecast for IT spending is looking uncertain at best. Some are concerned that cash-fueled M&A activity has been artificially inflating the value of acquired companies; the huge premium paid for 3Par by HP offering is a good example. That creates a nice payout for startup founders, but it doesn’t make investors very happy.

Until tech stock prices start rising again, pressure is likely to continue from investors and analysts on tech companies to offer dividends, and once they start offering dividends, to raise them. Rather than winning praise as a large-cap tech stock offering dividends, Microsoft had been pressured to fatten dividend payments in the months before this week’s announcement.

There will be holdouts, too, such as Apple and Google, with cash hoards of $25 billion and $30 billion, respectively. Google offering a dividend to investors is as likely a scenario (albeit one more pleasant to imagine) as Eric Schmidt performing a strip tease at a shareholder meeting. Google has always made it clear it will shovel profits into more innovation.

However, if enough companies start offering dividends, it will increase pressure on others. One of the benefits of dividends is that it rewards long-term shareholders like company employees who’ve obtained stock through options packages. If they see their peers at a rival company getting a de-facto raise through dividends, they may start to speak up themselves.

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Of course, the plot turns have been much more enjoyable for the bulls in recent weeks. After reporting its earnings for the first-quarter, traditionally a sleepy one for retail, the stock rallied 40% in two days. Amazon did in the quarter what few were expecting – it showed it was serious about pushing down margins that had been eroding for quarters.

Many observers, including myself, believed that surge was just a short squeeze that wouldn’t last long. We were wrong: The stock has pushed further to $73.31 last week, another 17% gain, largely on the back of its decision to sell DRM-free music tracks.

Few stocks can make moves like that without raising eyebrows. But we all know that’s just Amazon being Amazon – the stock operates according to its indigenous logic. As it turns another page to open up a new chapter, now is a good time to ask: Is Amazon finally too expensive? To answer that, it helps to review its short history:

In 1994, Jeff Bezos stared into a browser and saw a way to radically simplify the way we all shop. The idea let him take company public; but as the stock soared and Amazon expanded, the debt piled up. Bears predicted losses piling up until they drowned the company, but Amazon turned profitable in 2002, single-handedly kindling a tech recovery in the ashes of the dot-com bust.

But the bears wouldn’t admit defeat: Amazon wasn’t a technology company but just another retailer, they said – worse, a retailer with grimly low profit margins. But Amazon forged into new technologies, many successful (S3, Web services) and some not (Unbox). The 80% gain in Amazon’s stock in the last three months should shut down the Amazon’s-just-a-retailer argument, but also amplify the debate over its stock’s value.

You can see the whole epic in a glance in its one-decade stock chart. It almost looks like Amazon’s headed back up to the territory it charted during the last bubble.

Valuation-wise, Amazon is about as pricey as it’s been ever since it turned a profit. It’s trading at 55.7 times its forward earnings, even after analysts have repeatedly upped their profit forecasts. In early October 2003, right before the stock began a slow but rocky slide from $60 to $25, its P/E ratio was only slightly higher, at 58.9.

I like Amazon as a (technology) company, and think its underlying operations are strong and poised for more growth. For that reason, I am glad to see it’s not being beaten down by the bears anymore. But also for that reason, I hope it doesn’t surge much farther away from a sober valuation.

If it does, it would give the bears and the shorts another excuse to pummel the stock. But I suppose it would also open the door to yet another sequel in Amazon and Bezos’ excellent adventure.

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$3.9 million? What’s the big deal about a company that Google is investing less than 1/750th the cash is put out to buy DoubleClick? As Eric Schmidt has pointed out, Google buys companies with “1-2-3 people and you never, never hear about them.”

The big deal is this: Anne Wojcicki, who is a co-founder of 23andMe and who is also a shareholder and member of the board of directors, is married to Sergey Brin, Google’s President, Technology and one of its founders. Sergey also holds approximately 35% of Google’s Class B common stock.”

Oh, and some of that $3.9 million is going to pay back a $2.6 million loan that Brin made to 23andMe. Also, another participant in the round of investment is Genentech, whose CEO Arthur Levinson also sits on Google’s board.

All of which has prompted some bloggers to proclaim this “an obvious conflict of interest“. After all, this is all coming to light mere days after Brin broke so many hearts by marrying Wojcicki.

Okay, but hold on. A case could be made that there is a good reason for Google to make this deal. And although I realize I may end up regretting it, I am going to make that case.

The conflict-of-interest theory holds that Google was not only willing to breach business ethics, but defiantly disclosed it in an SEC filing. And that Brin was so intent on getting this deal done that he managed to get Levinson and his company, not to mention two top VC firms (Mohr Davidow and New Enterprise Associates) to join him in his lapse of integrity.

That’s a lot of intelligence to vanish all at the same time, on the same deal. There is a lot of crazy thinking in Silicon Valley these days, but not that crazy.

Marital bliss aside, does the deal make sense? The first thing I thought of when I read about is was another deal: Microsoft’s purchase of health-care search engine Medstory in February. It was the latest of small, quiet buys Microsoft has made to get a footing in the market for consumer-oriented health-care information. Microsoft sees a big market there one day, and an investment in 23andMe lets Google chart yet another collision course with Microsoft’s ambitions.

It’s also interesting to see Google and Genentech collaborating on a deal. Both have been innovative leaders in their respective industries, and this investment could signal that they see a rekindling in bioinformatics years after the initial buzz surrounding genomics fizzled away.

Finally, I’ve been poking around only a little bit, but I haven’t yet found a company that gives Google a better entry into a genomics-for-consumers startup. There is Family Tree DNA but it’s focused more on genealogy than health. And 454 Life Sciences which is geared more toward companies than consumers, and SNPedia more of a resource than a service.

That’s far from an exhaustive list, and if anyone can find a more deserving vehicle in this niche for Google’s money, please leave your comments below.

Whatever conflicts there may appear in this deal, it’s a far cry from a $2 million birthday party for Mrs. Kozlowski. If Google wants to really organize the world information, it needs to consider DNA, the most personal of data. And what 23andMe is purporting to sell is the ultimate in navel gazing.

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Of course, if Microsoft did that in one day everyone would think its executives had gone mad. After all, it already employs a modest 71,000 people around the world. Instead, it’s paying out $2.85 million for each of the 2,106 employees who work for aQuantive. Which, no matter how hard as people labor to rationalize this deal, is at the very least slightly more mad than that, if not good old-fashioned American bat-shit insanity.

Just as Microsoft was obsessed 10 years ago with an iron grip on the computer desktop – a vision that proved almost fatally shortsighted – it’s now obsessed with having a Bigfoot-sized imprint in the online-advertising industry.

Sure, being shut out by Google and to a lesser extent Yahoo has to be painful today, but the fact is Microsoft is seeding several markets that may well be just as important if not more important in a few years on: video games, online business transactions, health-care software and consumer-oriented robotics.

Still, Microsoft blunders on into online ads like a middle-aged ex-quarterback bent on reliving those glory days of high school. In the world of M&A, as in a post-midnight dive bar, desperation is a cheap cologne. If anyone smells it on you, they hold it against you. After Friday’s news, Microsoft is fairly doused in eau de désespoir.

Yet as always happens whenever something occurs that makes no sense whatsoever, there is no shortage of explanations: Microsoft lost Yahoo, so this is its last best option in online advertising. No wait, this allows Microsoft to get back into the courting dance with Yahoo. Or just maybe, Microsoft knows a bargain when it sees it.

The thing is, aQuantive is a respectable enough, if already overpriced, company. But its value has been erratic. Before the whole media-merger mania caught fire, aQuantive went from $11 two years ago to $29 in early 2005, down to $19 that same summer, and back up to $29 a few months on.

So aQuantive as an investment is kind of like John Travolta’s career: It really all depends on when you catch him. Are you getting the epoch-defining Saturday Night Fever or its unpalatable sequel Staying Alive? Pulp Fiction or Michael?

Just Microsoft’s luck, Travolta is about to headline the new Hairspray in drag. Microsoft wants a bride who resembles Doubleclick, snatched away by Google earlier this spring, but aQuantive has been dabbling all along in, shall we say, alternative revenue streams: “behavioral targeting businesses” and “creative development and branding,” and whatever those euphemisms, taken from aQuantive’s last 10-K, might suggest.

Microsoft has often been compared with Google unfavorably in recent years. One thing both companies shared in common was their restraint in spending hard-won capital. But with Google’s $3 billion buy of Doubleclick and now Microsoft’s buy of aQuantive that’s twice as large, I fear we are in uncharted territory of M&A-Land.

Well, territory that hasn’t been charted since the hyper-aQuisitive days of the dot-com years. But who would rationally choose to return to those silly times?

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That much we know from the mischievous email that was apparently sent out to Apple employees and that – naturally – quickly found its way into the tech-news cycle via the respected and highly trafficked tech site Engadget. The terse email said simply that the iPhone would be delayed to October from June and that the OS X Leopard operating software would not be released until January.

(Apple declined to offer any comment beyond reiterating that the email “wasn’t authentic” and that both the iPhone and Leopard are on track as previously announced.)

That was enough to cause Apple’s stock to tumble 5% from its morning high.

It took only seven minutes for Apple to fall to its intraday low of $103.42 from $108.83. Apple was trading below $105 for only two minutes, but in those two minutes more than 2.2 million shares were traded.

In the volatile 23 minutes of turmoil between the minute the disinformation hit the stock market at 8:55 PST and Apple’s announcement that the initial email “is fake and did not come from Apple,” nearly 15 million shares changed hands. That’s 60% of Apple’s normal volume in well under a half hour. That’s also an awful lot money lost for some investors – and gained for others – all of it because of a lie.

There are two things about this that are interesting: The practice itself, seeding the stock market with deceptive news that moves prices, is usually reserved for over-the-counter stocks, where a frantic post on a hyperactive message board can cause illiquid stocks to rise or fall five or 10 percent in less than a day.

But Apple, with an average trading volume of 25 million shares a day, is no penny stock. And yet, given all the hype that has surrounded the iPhone since January you’d have to think long and hard to come up with a piece of fake-news that would cause, in a matter of seconds, more investors (and Apple fanboys) to lose control of their anal sphincter muscles than this rumor did.**

The other notable twist is in how the fake news was spread. It seems someone figured out how to send an email to Apple employees around the world, putting the familiar “Bullet News” in the from line (for Apple’s sake, one hopes this is not as simple as sending an email to “everyone@apple.com”).

A week ago, I noted how H-P pre-announced key earnings data after a non-employee had been emailed access to the market-moving numbers. This incident is the dark side of the same phenomenon: An email leads to investors being broadsided with surprising news, only this time the message is false.

And the fallout? Apple reacted as swiftly and judiciously as H-P did. The SEC would do right to take this as seriously as they do backdated stock options, and look into who may have profited from shorting the stock ahead of the news.

And there is also already debate about how Engadget handled the news. Some say it just ran with what an Apple employee sent in; others say it could have benefited from double-checking with Apple. But let’s not forget that only 11 days ago, the New York Post, the country’s 13th oldest newspaper, ran the rapidly discredited news of a Microsoft-Yahoo merger. That fake news drove Yahoo’s stock up 19%, and most of those gains have since eroded away. The SEC has its work cut out for it.

But what really stands out for me in this bizarre but fascinating episode is that Apple investors were taken by a technological goof that could have happened a decade ago but that in 2007 is like being sold the Eiffel Tower. If the irrational hopes surrounding the iPhone had not gotten so overheated, this would never have happened.

Hat tip to Paul Kedroksy for coming up with the phrase, Stock Hackers

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