Abstract: In May 2012, as Facebook prepared for its initial public offering (IPO), company executives and investment bankers were trying to determine the initial offer price. Facebook indicated the price would be between $28 and $35 per share in its most recent pre-IPO registration statement. However, recent performance and strong investor demand during the road-show may have warranted an increase in the IPO price. Facebook had grown quickly since its founding in 2004 to over 900 million users all across the world. The dramatic growth in users had resulted in substantial revenue and income growth as well; however, there was some evidence that Facebook's growth may have been slowing. This slowing growth along with the mixed performance of several recent technology IPOs made it difficult to forecast the future cash flows and value Facebook. In addition to the valuation, investors had to also consider the fact that Mark Zuckerberg, Facebook's CEO, would control over 57% of the voting rights even after IPO.INTRODUCTIONFacebook knows more things about more people than does Google, and those people have stronger emotional connections and loyalty because that's where their friends are. So given a few years to figure it out, Facebook could end up being worth more than Google, which has a market value of $200 billion. -Kevin Landis, Chief Investment Officer, Firsthand Capital1A $100 billion valuation would have us believe that Facebook is worth 53% of Google, even though Google's sales and profits are 10 times that of Facebook- Francis Gaskins, President, IPOdesktop.com2On the evening of May 17, 2012, Facebook's management team met with the senior managers at Morgan Stanley to determine the appropriate offer price for Facebook's initial public offering (IPO). The IPO was scheduled for the next morning and Mark Zuckerberg was scheduled to ring the opening bell on the NASDAQ with Facebook commencing trading under the ticker symbol FB.3 The lead analyst at Morgan Stanley had completed the discounted cash flow and multiples valuations; however, he knew the pricing was not that simple. While there was strong demand for Facebook's stock, pegged at nearly 4.5 times the offering, the lead analyst wanted to ensure the investment banks' clients were not disappointed by overpaying for Facebook, nor did he want to disappoint Facebook's management team by leaving too much money on the table.4 Also, Morgan Stanley wanted to get the pricing right this time after it was perceived to have done a poor job in pricing recent technology IPOs, namely LinkedIn and Zynga.On February 1, 2012, Facebook filed an initial registration statement with the Securities and Exchange Commission (SEC) and formally announced its intentions to conduct an initial public offering. This was potentially the second biggest initial public offering in the history of securities markets after the Visa IPO on March 18, 2008. Facebook was founded by Mark Zuckerberg in 2004 as a social networking site for students at Harvard University and in a span of eight years it had expanded to over 900 million monthly active users globally. The potential to monetize this tremendous user base had caught the fancy of investors. The chatter about a potential Facebook IPO had been on for many years, but the financial crisis of20072008 led to a slump in the IPO market. In January 2011, Goldman Sachs helped Facebook raise $1.5 billion through a private offering to off-shore investors. This offering excluded U.S investors as it had attracted a lot of media attention and was in danger of violating U.S. Security laws for private placements. It was believed that foreign investors poured in orders of more than $4 for every $1 in shares being sold.5 Thereafter, 2011 saw several technology sector IPOs like LinkedIn, GroupOn and Zynga with mixed market reactions, followed by the much awaited Facebook IPO announcement in early 2012.In April 2012 Facebook bought Instagram, a photo sharing social networking site for $1 billion and paid 70% in stock, which implied that Facebook priced its stock at $30 prior to the IPO date. …
Publication Year: 2014
Publication Date: 2014-04-01
Language: en
Type: article
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Cited By Count: 1
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