Facebook IPO Example

Essays on Facebook IPO Essay Facebook IPO Facebook, the social networking giant, with over 800 million users and $3.8 billion in revenue last year is going public, most probably sometime between April and June of this year. (Cohan ,2012) There has been a lot of hype regarding this matter. The investors are speculating, the internet is bubbling with opinions and the news agencies are calling it the biggest IPO since Google. So what are the reasons behind Facebook going public? Because the company is doing well by financial standards with over $1.5 billion in profits last year the company itself is worth near $75 – 100 billion. (Swedroe ,2012) Mark Zuckerberg has been keen on keeping the company private i.e. owned by a limited number of shareholders only. But now the company has to go public, the reasons can be divided into 2 broad categories. Financial reasons Non Financial reasons Non Financial reasons Let’s talk about the non financial reasons first: 1. Regulations: First and foremost the SEC rules. The Securities and Exchange Commission ruled in 1964 that â€Å"Any private company with more than 500 ‘shareholders of record’ must adhere to the same financial disclosure requirements that public companies do.† Due to this legal issue Facebook now has to follow the similar financial scrutiny as a public company does. This in business terms is an additional cost with no additional benefit. It can be said that Facebook is going public because the number of shareholders which own the company went past 500 at the end of 2011. It is interesting to note that Facebook even lobbied to get this rule extended; increasing the number of shareholders to 2000 before such regulations apply. (Sloan ,2012) 2. Benefit for the employees: It is commonplace for tech start ups like Facebook to offer shares of the company to its employees as in incentive. Same was the case with Facebook until the number of its shareholders started increasing, and like it was mentioned above Mark Zuckerberg was not too keen to cross the 500 mark. (Syre ,2012) Therefore the company started offering restricted stocks which is only converted to common stock once the companies goes public. This was not a good sign for the employees who could now only get their stocks cashed when they leave the company, which was not a reasonable option for many. Hence the IPO would help in acquiring and retaining HR and also it would help them get the return for working and owning Facebook. (Sloan ,2012) Financial Reasons Coming to the financial reasons now, quite simply put it is for the money. The IPO is valued at $5 billion and can go up to $10 billion. Furthermore it would turn a 1000 or so shareholders into millionaires and increase the Mark Zuckerberg’s worth to $16 billion, who owns 28% stake in the company. Two major reasons why this additional cash is lucrative for Facebook are: 1. Competition with Google for internet dominance. 2. Acquisitions of different companies. Facebook’s competition with Google has now turned into a real deal. Google Inc. which has now started offering a variety of services as the company grew has now forayed into Facebook’s playing field that is of social networking with its Google Plus. Although a new player, Facebook has all the reasons to be worried. Google is now dominating the internet world by either offering or acquiring different services. They have the means, resources and the skills required to capture the social networking arena as well. Therefore an additional cash of at least $5 billion would give Facebook additional leverage required to tackle Google. They would be able to initiate projects that will protect its precious consumer base of 845 million users. Another important reason for Facebook going public to raise money is because the company has had a lot of cash out flows recently. In the last two years alone Facebook has acquired 15 companies. The total amount of cash that Facebook had to let go is undisclosed. But a rough estimate of the purchase price of 7 of the last 15 companies goes into the region of $150 Million. The amounts of the remaining 8 companies is undisclosed. Google on the other hand has $50 billion in cash to acquire small start ups. (Rushe and Chaudhuri ,2012) Hence the IPO would provide the company with the necessary room to maneuver in this war against Google. Advantages to Investors Retail investors Facebook’s IPO certainly is lucrative. It is an opportunity to be a part of a company that we all come in contact with everyday. And considering the track record of Facebook ever since it was launched 8 years ago, it might not even be a bad option. After all the company is now worth up to $100 billion in just eight years. But small retail investors may or may not be able to participate in the process. With now 31 banks involved in the underwriting process (Barr and Oreskovic ,2012) the chances of large corporations and high net worth individuals siphoning all the shares are high. With the IPO still at least 3 months away nothing can be said with certainty. But Facebook is a company similar to what Google was in 2004. And investors are certainly not forgetting the fact that the shares of Google which were purchased by retail investors initially at $85 hiked up to $580. So there is a lot to gain in case it is decided by the company to include the small investors. (Hamilton ,2012) Large Shareholders The large shareholder will have a lot to gain with the Facebook’s IPO. With 31 banks underwriting the process, their major clients would certainly be given a chance to take part in the proceedings. Also initially before the fillings of the S-1, it was believed that there would be prerequisites to be an eligible investor. First an annual salary of over $ 200,000 and your company’s annual income being in excess of $1 million. (Ramil ,2012) Other than the fact that Facebook employees, the banks and the initial shareholders would be making a lot of cash due to the IPO. Large financial institutions, private companies and wealthy individuals would get a chance to invest in a company where revenues grew at an annual rate of 127% between the years 2009 and 2011 and net profit being $1.5 billion last year. Bibliography Barr, Alistair and Alexei Oreskovic. Facebook adds 25 more underwriters for IPO. 7 March 2012. 12 March 2012 . Cohan, Peter. "Four Reasons Why Facebooks IPO is Irrelevant." Forbes (2012). Hamilton, Walter. "Small investors may have chance to get shares of Facebook IPO." LA Times (2012). Ramil. Investing in Facebook IPO Stock Options. 6 February 2012. 12 March 2012 . Rushe, Dominic and Saabira Chaudhuri. "Facebook IPO: six things you need to know." 31 January 2012. theguardian. 12 March 12 . Sloan, Paul. "CNET." 31 January 2012. CNET News. 12 March 2012 . Swedroe, Larry. "Why Facebooks IPO shouldnt excite you." 1 February 2012. CBS News. 11 March 2012 . Syre, Steven. "Facebook’s IPO issues." Boston Articles (2012).