Facebook is about to burst out of the IPO gate Friday, with a blistering initial public offering that is expected to raise billions — not to mention the eyebrows of some investors on Wall Street.
* Facebook IPO could raise more than $18 billion.
Illustration by Kris Kinkade, USA TODAY; photo resource by Siri Stafford, Getty Images
Facebook IPO could raise more than $18 billion.
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Illustration by Kris Kinkade, USA TODAY; photo resource by Siri Stafford, Getty Images
Facebook IPO could raise more than $18 billion.
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Priced at $38 a share on Thursday, the 8-year-old social-networking company, fronted by hoodie-wearing CEO Mark Zuckerberg, could raise $16 billion in funding, not including an overallotment option. It could end its first day of trading worth up to $104 billion. That would make it worth more than Disney, Ford and Kraft Foods. It would be the second-largest U.S.-listed IPO behind only Visa. Facebook’s market debut, the biggest tech company IPO ever, should create 1,000 millionaires overnight.
The mega-offering signals a seminal event in the Internet’s maturation as a fundamental cog in the world economy, says Dave Morin, CEO of Path, a social network of 3 million and a former Facebook executive. “It sets the tone for long-term, product-driven Internet companies,” he says.
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MORE: Complete coverage of Facebook’s IPO
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“This is an IPO with enormous impact,” says Charlene Li, founder of market researcher Altimeter Group. “No one will touch Facebook in its market for the next few years.”
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COLUMN: Ask Matt: Should a first-time investor buy Facebook?
Froth over Facebook’s first day of trading on Nasdaq has become a national obsession, sparking debate over Zuckerberg’s hoodie, the scope of the social network’s influence on American culture and the Internet, and what it all means to a sputtering U.S. economy. Facebook’s IPO dwarfs that of Google, which raised $1.7 billion in 2004, but the comparison ends there. Google’s revenue then was $3.2 billion and soaring while Facebook’s already show signs of cooling off.
Scrutiny will be intense
Going public means Facebook sacrifices some financial flexibility and will raise questions about its financial bona fides, says Nancy Miller, author of The Facebook IPO Primer. It faces “intense scrutiny from shareholders,” Miller says.
Concern about that issue was underscored in a letter Zuckerberg wrote in the company’s registration statement, in which he vowed to continue to operate Facebook as if it were a private company.
“Simply put: We don’t build services to make money; we make money to build better services,” wrote Zuckerberg, who controls 55.8% of company stock voting rights.
Not that Zuckerberg is indifferent to the wants and needs of investors. Despite reports that he would nix participating in the road show to drum up support for the IPO, Zuckerberg participated.
One of the topics undoubtedly broached is how Facebook intends to ramp up revenue to meet the heightened expectations of investors and analysts in the months — and years — to come. Speculation has centered on Facebook introducing search functions and an ad network for third-party sites.
It may have no choice but to speed up an already-aggressive product timetable to diversify revenue and satisfy shareholders in the coming months. That’s because its biggest source, ads, has dipped. Last month, it reported first-quarter ad revenue was $872 million, down 7.5% from the previous quarter. It blamed “seasonal trends” and shifting user growth for the decline.
Longer-term concerns?
Facebook is under mounting pressure from Wall Street to unearth new revenue to reduce its reliance on advertising, which accounted for 85% of its revenue last year.
In fact, Facebook may have lost some of its fizz in the days leading up to the IPO because of slackening advertising revenue growth projections. The company is expected to haul in $5.06 billion in total revenue this year, up 61% from 2011. But its ad business is expected to grow just 33%, to $6.72 billion, in 2013, eMarketer says.
What’s more, the Google Display Network is trouncing Facebook in key advertising areas. Google banner ads, for example, are more than 10 times more likely to be clicked on than Facebook ads, according to research from WordStream, a maker of search-engine marketing software and services.
That was underscored Tuesday, when General Motors said it will pull its paid advertising from Facebook — raising questions about Facebook’s ability to service blue-chip clients.
While Facebook’s boffo IPO is sure to tickle some investors, a faction of Wall Street “traditionalists” are sure to raise their eyebrows at the company’s perceived market value.
While Apple closed Thursday at a seemingly steep $530 a share, for a market capitalization of $494 billion, the stock remains relatively cheap at a price-to-earnings ratio of 13.3. Google also is a high-priced stock, at $623 a share and a market cap of $160.7 billion, and its P-E is a little richer at nearly 24. But, like Apple, its annual profit is in the billions, and it is arguably one of the few companies that can support its valuation and growth expectations regardless of market conditions.
“For several years, Yahoo suffered because it underperformed when compared to Google,” social-media analyst Greg Sterling says. “The stock got punished. There is some of that potential with Facebook (when compared with Google, Apple and others).”
But in the breathless buildup to a blockbuster IPO steeped in hype, there are concerns:
•The mobile-advertising puzzle. Like everyone else, Facebook is trying to figure out the Rubik’s Cube that is mobile advertising. The market holds vast promise, but few have cashed in. Under a best-case scenario, Facebook would generate up to $2.54 billion in revenue from new mobile traffic this year, up 68% from 2011, according to market researcher Chitika.
Facebook is determined to make a go in mobile, even though it has yet to make much money there. It snapped up photo-sharing app Instagram for $1 billion, redesigned its three mobile apps, launched several industry initiatives and offered some details on its efforts to move its desktop platform onto smartphones and tablets.
The push paid off with 160 million visitors to mobile apps on Facebook last month, up from 60 million in late February. Mobile users accounted for 1.1 billion visits to Facebook mobile apps, compared with 320 million in late February, according to a Facebook company blog post. Facebook says seven of the top 10 grossing iOS apps and six of the top 10 Android apps have Facebook integration.
Mobile is growing fast on Facebook, but if Facebook stuffs ads on mobile carelessly, it “risks alienating users,” analyst Sterling says.
•The social-commerce hole. Investors are sinking money into start-ups offering subscriptions, curation and celebrity endorsements in a bid to capture a slice of Facebook’s market.
Yet major brands such as Gap, Nordstrom, GameStop, J.C. Penney and Old Navy shut their virtual storefronts on Facebook when they didn’t spur consumer sales.
Still, there are hundreds of thousands of smaller sellers betting Facebook can develop into an e-commerce powerhouse to rival Amazon.com and eBay. Many are pushing out shopping apps, hosting online garage sales and testing new business models on Facebook.
E-commerce platform vendor Payvment is signing 1,500 small and midsize sellers a week, and is up to 155,000.
“One-to-one marketing doesn’t work on Facebook, but it is a great influencer in a one-to-one-to-many manner, when someone ‘Likes’ a product,” says Brian Solis at market researcher Altimeter Group.
•Slackening social-gaming revenue. After two years of soaring growth, the number of gamers on Facebook languished in 2011, says market researcher IHS. At the end of 2010, about half of Facebook’s monthly active users played games. By early 2012, that number had plunged to one in four.
But there is strength in those diminishing numbers. Sales of virtual goods in mobile games in the U.S. are expected to vault to $500 million this year compared with $350 million in 2011, says researcher WebMediaBrands.
Life, post-IPO
Life in the post-IPO world can be humbling. Groupon’s recent stock woes are a cautionary tale of what can happen to a once-hot Internet commodity that loses its way. Its stock price plummeted shortly after it started trading.
“Going public is one of the worst things that a tech company can do,” analyst Sterling says. An IPO “exposes (Facebook) to scrutiny that they did not have.”
Investors and analysts will ratchet pressure on Facebook to “start chasing revenue (they) might not otherwise to show near-term growth,” Sterling says. Ultimately, he says, Facebook might dive into search, mobile or an ad network for third-party sites.
Privacy as a commodity
There is also the inevitable pressure to monetize data for advertising purposes, which could raise privacy concerns.
Such is the calculus of lingering privacy issues for Facebook, which must be careful not to share too much of its members’ data with eager marketers and advertisers.
“Facebook has a database filled with information about 900 million users,” says Allie Kline, chief marketing officer at 33Across, a social-marketing analytics company. “That’s a lot of power, but it’s no different than what Google, Yahoo and Microsoft face weighing user data vs. privacy.”
It is a challenge most companies would pine for, as a prominent venture capitalist notes.
“The Facebook arguments (against) are lunacy,” says Bill Gurley, general partner at VC firm Benchmark Capital. “Any challenge they face is offset by little chance of anyone knocking them off. Their competitive advantage is that big.
“They have been held up as poster child for so long, that some feel the need to dwell on the negative,” Gurley says.
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Wall Street has one simple task as Facebook Inc. shares begin trading: Don’t mess it up.
Major stock exchanges, brokerage firms and mutual fund companies have been gearing up for one of the biggest initial public offerings on record. And, with all the hype surrounding the social-media giant, any snafus would be a major embarrassment.
“It has to go off without a hitch. There’s going to be a lot of visibility on this,” said Larry Tabb, chief executive of the TABB Group consulting and research firm. “If this goes poorly, it will not just be a poor reflection on Nasdaq — it will be a poor reflection on the U.S. market structure.”
In pricing its stock at $38 on Thursday, Facebook raised $16 billion in the third-biggest IPO in U.S. history and the largest ever by a tech company. The stock trades as FB.
The company is expected to sell an additional $2.4 billion in stock later this month, raising the total value to $18.4 billion. That would make it the second-largest U.S. IPO, trailing only the $19.65 billion raised by Visa Inc. in 2008.
The IPO values Facebook at $104 billion, by far the largest ever for a newly public company.
Facebook shares are scheduled to begin trading at 11 a.m. Eastern time, 90 minutes after the Nasdaq Stock Market opens. The late start is designed to give the stock exchange and Wall Street brokerage firms sufficient time to process what is expected to be a crush of opening-day orders.
At center stage is the Nasdaq, considered to be the world’s premier home for technology companies. The exchange has been testing various scenarios for how the stock will open, checking its systems through a dummy ticker — ZWZZT — to allow clients to practice processing their orders.
Glitches do happen. In April, when software developer Splunk Inc. went public on the Nasdaq, the price soared so high the exchange halted trading. However, trading reportedly continued elsewhere, leading to canceled trades.
The biggest blunder happened in March when BATS Global Markets, an electronic trading platform, suffered a trading debacle. A software glitch sabotaged the company’s own IPO, which sent the stock plummeting and forced it to cancel the offering altogether.
BATS has been in talks with Nasdaq about the Facebook IPO, but hasn’t participated in any of the tests. However, clients have been routing test orders of Facebook through the exchange, spokeswoman Stacie Fleming said.
Meanwhile, the New York Stock Exchange is making sure it is ready for the crush of new shares that will be dumped into the market Friday. The Big Board has dedicated a server just for Facebook trading that will be done on the NYSE Euronext Inc.’s all-electronic Arca exchange.
“We’re fully prepared,” NYSE spokesman Rich Adamonis said.
Tabb said myriad problems could arise, though he predicted high volume wouldn’t be one.
Buyers and sellers may not get access to the stock, he said, because market data feeds connecting all the exchanges could hit a snag, trading algorithms may not be properly tuned, or a server could crash.
“If there’s a problem it’ll be a technology glitch,” Tabb said.
Brokerages are getting ready to field phone calls from customers who want Facebook shares — and potentially upset clients who didn’t get as large of an IPO allotment as they wanted.
Fidelity Investments in Boston, one of the country’s largest retail brokerages, has employees on standby to deal with high customer demand, spokesman Steve Austin said.
Wall Street might spend the remaining few hours before Facebook’s public debut worrying about what might go wrong. But there’s a decidedly different atmosphere on the West Coast at Facebook’s Menlo Park headquarters.
Hundreds of employees spent Thursday in a “hackathon” — an all-night work session for programmers and engineers.
Even founder Mark Zuckerberg was expected to attend the event — until he rings the Nasdaq’s opening bell.
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Facebook IPO Makes Zuckerberg Richer Than Google Founders
By David De Jong and Devon Pendleton – May 18, 2012 2:52 AM GMT+0530
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Facebook Inc. (FB)’s $16 billion initial public offering has made 28-year-old Mark Zuckerberg the 29th richest person on Earth.
Facebook, the world’s most popular social networking company, sold 421.2 million shares for $38 each. At that price, the 503.6 million shares and options Zuckerberg owns are valued at $19.1 billion, making him wealthier than Google Inc. (GOOG) co- founders Sergey Brin and Larry Page, according to the Bloomberg Billionaires Index.
Enlarge image Zuckerberg’s Facebook IPO Makes Him Richer Than Google Founders
Zuckerberg’s Facebook IPO Makes Him Richer Than Google Founders
Zuckerberg’s Facebook IPO Makes Him Richer Than Google Founders
Mike Kepka/San Francisco Chronicle/Corbis
Facebook CEO Mark Zuckerberg in San Francisco.
Facebook CEO Mark Zuckerberg in San Francisco. Photographer: Mike Kepka/San Francisco Chronicle/Corbis
Buying Into IPOs a `Very Bad Strategy,’ Feiger Says
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May 18 (Bloomberg) — George Feiger, chief executive officer of Contango Capital Advisors Inc., a San Francisco-based wealth management firm, talks about the possibility of Greece exiting the euro area, the initial public offering of Facebook Inc. and his investment strategy. Feiger speaks with Susan Li on Bloomberg Television’s “First Up.” (Source: Bloomberg)
“Zuckerberg doesn’t think about his wealth,” David Kirkpatrick, author of “The Facebook Effect,” a history of the company, said in a telephone interview May 17. “This is a huge success for everybody. There’s no way it can be seen otherwise.”
Facebook’s chief executive officer started the Menlo Park, California-based company for Harvard University classmates as a 19-year-old in his dorm room. It now has more than 900 million monthly users and generated $3.7 billion in revenue in 2011.
Zuckerberg sold 30.2 million shares for $1.15 billion during the offering. Most of the proceeds will be used to pay the taxes associated with exercising 60 million stock options.
Moskovitz, Saverin
Facebook’s $104.2 billion valuation crystallizes the fortunes of the company’s three other co-founders. Dustin Moskovitz, 27, who roomed with Zuckerberg at Harvard, is now worth $5.1 billion. He owns 133.7 million shares of the company’s Class B stock, and will sell 7.5 million shares if the underwriters exercise their option to purchase additional stock.
Moskovitz, the company’s first chief technology officer, left the social network with Facebook colleague Justin Rosenstein in 2008. The duo founded Asana Inc., a task management software company. The company received $9 million in funding from venture capital firms Andreessen Horowitz and Benchmark Capital in 2009, both of Menlo Park.
Eduardo Saverin, 30, has a $2.7 billion estimated fortune. He owned about 4 percent of the company’s outstanding shares prior to the offering, according to whoownsfacebook.com, which is published by Massinvestor Inc. and draws its information from Facebook’s filings with the SEC, press releases, news reports and other publicly available sources.
The Brazil-born Facebook co-founder renounced his U.S. citizenship last year and is now a permanent resident of Singapore. Saverin’s move could save him $67 million in federal taxes, according to data compiled by Bloomberg.
Saverin declined to discuss his stake in a telephone interview from his home in Singapore.
“I am obligated to and will pay hundreds of millions of dollars in taxes to the United States government,” he said in May 17 statement.
New Republic
Co-founder Christopher Hughes, 28, owns about 22 million shares of Facebook, according to a person familiar with his holdings who asked not to be named because the matter is private. At $38 per share, his stake is worth $836 million.
Hughes, who bought the Washington, D.C.-based magazine the New Republic in March 2012 for less than $5 million, has more than $100 million in cash and real estate after selling some of his Facebook hoard, according to data compiled by Bloomberg. Facebook shares would need to rise 7.9 percent to $41 for Hughes’s fortune to crest ten figures.
Peter Thiel provided Facebook’s first outside investment: $500,000 in 2004. Today, he has a net worth of $2.7 billion. The Founders Fund Management LLC partner sold 16.8 million shares during the offering and owns almost 28 million shares of Facebook following the deal, according to regulatory filings.
Thiel, who co-founded PayPal Inc., owns his Facebook shares through holding companies such as Rivendell One LLC and Lembas LLC. He also owns stakes in Palantir Technologies Inc., which makes data processing software, and Valar Ventures Management LLC, a venture fund that invests in New Zealand and Australian companies. The name of each of those entities was inspired by the writings of J.R.R. Tolkien.
Napster and Cocaine
Thiel was brought to Facebook by technology entrepreneur Sean Parker, who met Zuckerberg at a Manhattan restaurant in 2004. He persuaded Zuckerberg to move to California to focus on the company full time. The 32-year-old Parker has a $2.8 billion net worth, and will sell 10 million shares if the underwriters exercise their option to purchase additional shares.
Zuckerberg hired Parker, who had co-founded the Napster Inc. file sharing service with Shawn Fanning in 1999, as its first president. Parker left Facebook in 2005, after police found cocaine at a North Carolina beach house where Parker was hosting friends on vacation. No charges were filed.
For his early role in Facebook, Parker was given almost 70 million shares. He sold 3.65 million shares in the secondary market prior to the company’s IPO.
The offering made Facebook’s chief operating officer Sheryl Sandberg a billionaire. Sandberg, 42, who was lured from Google in 2008, owns about 27 million shares, including 25 million restricted stock units that have vested. She also owns more than 14 million unvested units that aren’t counted in her net worth calculation.
Mafia Wars
At the offering price, her vested stake in the company is worth $1 billion. Sandberg also owns small stakes in Starbucks Corp. (SBUX) and Walt Disney Co. (DIS); she is a director at both companies.
Facebook’s offering further elevated Mark Pincus, the founder of Zynga Inc. (ZNGA), the world’s largest social gaming company, in the billionaire ranks. Pincus, 46, owns 13 percent of Zynga, whose popular online games such as Mafia Wars and Farmville generated more than 10 percent of Facebook’s sales in 2011. The company’s shares are down more than 40 percent since March.
Pincus owns 4.3 million shares of Facebook. With his Zynga stock, he is worth $1.3 billion. He sold 1 million Facebook shares during the offering, earning him $38 million.
Alisher Usmanov, Russia’s richest man, controls about 80 percent of the 85.6 million Facebook shares owned by investment company Digital Sky, which was founded by Yuri Milner. Digital Sky sold 45.7 million shares in the offering and may sell more in the coming months, according to regulatory filings.
Milner owns about 12.5 percent of the company’s Facebook shares and has a net worth of $1.1 billion, according to data compiled by Bloomberg. Digital Sky also owns stakes in Zynga, Groupon Inc. and Twitter Inc.
Double Google’s Valuation
Usmanov — whose most valuable asset is his 50 percent stake in Metalloinvest, Russia’s largest iron ore producer –has never met Zuckerberg.
Facebook, which makes 85 percent of its revenue from advertising, is valued at 25.8 times trailing 12-month sales, more than double Google’s valuation when the search engine debuted in 2004.
The company will begin trading on the Nasdaq May 18.
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