Facebook Inc. is inching closer to an initial public offering that it hopes will value the company at more than $100 billion, according to people familiar with the matter.
The social networking firm is now targeting a time frame of April 2012 to June 2012 for an initial public offering, said people familiar with the matter. The company is exploring raising $10 billion in its IPO—what would be one of the largest offerings ever—in a deal that might assign Facebook a $100 billion valuation, a number greater than twice that of such stalwarts as Hewlett-Packard Co. and 3M Co.
A Facebook IPO has been hotly anticipated for several years, and viewed as a defining moment for the latest Web investing boom. The company has been vague about whether it would even make such an offering and silent on timing of an IPO. Facebook spokesman Larry Yu said.
"We're not going to participate in speculation about an IPO."
The company now appears poised to go ahead with a deal. But it will likely come to market at a time when investors are beginning to question the value of some newer Internet businesses.
The most recent IPO, an $805 million float of discount-deal service Groupon Inc. on Nov. 3, has plummeted 42% in price in the past five trading days after surging in its first day of trading. Business-networking service LinkedIn Corp., whose stock more than doubled from its IPO price on its first day of trading May 19, has since fallen 36%, but remains 33% above its IPO.
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Facebook Chief Executive Mark Zuckerberg has in the past publicly expressed reluctance to do an IPO. And he has opted to keep Facebook private longer than many suspected he would.
But he is warming to the idea. Facebook is now in internal discussions over the timing of its filing with the Securities and Exchange Commission, and is considering filing dates as early as this year, said these people. Mr. Zuckerberg hasn't made any final decisions, these people cautioned.
Facebook remains aloof from Wall Street and shows signs of wanting to play by its own rules.
Companies often explore an IPO once they have $100 million in revenue. Facebook is expected to debut with more than $4 billion in revenue, making it bigger than Web veteran Yahoo Inc.
Facebook has gone so far as to craft its own prospectus, said the people familiar with the matter. A prospectus document—which is filed with the SEC outlining the company's business—is typically prepared by bankers and lawyers hired by a company.
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Facebook Chief Financial Officer David Ebersman has been leading the company's talks with Silicon Valley bankers about an IPO, said people familiar with the matter.
Bankers are aggressively pursuing the company, but Facebook remains elusive about a commitment to specific banks, even though an IPO looms. Mr. Ebersman told some bankers that he is skeptical over what contribution investment banks could make to a Facebook IPO, since the company is so highly sought after by major investors, said people familiar with the matter.
The social network, which was started by Mr. Zuckerberg in 2004 out of his Harvard University dorm room, has led the way in reshaping how people share information and interact with others on the Web. It now counts 800 million users, with 500 million users logging into the site daily.
Facebook will be required to make its financial information public by April, because the company will cross the 500-shareholder limit by the end of this year. The SEC requires companies with more than 500 shareholders to publicly disclose its financial information.
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Facebook could publish its financial information come April without an IPO, but board members and top executives have privately acknowledged that it would leave the company at a severe disadvantage, since they would have most of the liability that comes with being a public company, but lose out on the fundraising benefits of a public offering, said these people.
Only 13 IPOs have ever been completed with a value greater than $10 billion, and just three of those have been for U.S. companies, according to Dealogic, which tracks new securities issues. The only U.S. issuers at that size level have been Visa Inc. at $19.7 billion in 2008; General Motors Co. at $18.1 billion in 2010; and AT&T Wireless Services Inc. at $10.6 billion in 2000.
The most valuable company ever to go public was Industrial & Commercial Bank of China, which sold $21.9 billion of stock in October 2006 and finished its first day of trading with a market value of $148 billion, Dealogic said.
A Facebook offering of $10 billion would be the largest IPO by any technology or Internet company. The largest U.S. Internet IPO, the $1.9 billion sale in 2004 by Google Inc. which valued Google at $23 billion, ranks No. 3 among global Internet IPOs.
Facebook's revenue is driven by its online advertising business, as big brands rush to the site to interact with consumers through display ads and fan pages. Facebook's world-wide ad revenue is expected to hit $3.8 billion this year, up from $1.86 billion a year earlier, according to data compiled by eMarketer. Facebook's share of display ad revenue in the US is expected to grow to 16.3% in 2011 and 19.5% in 2012, eMarketer found.
COMMENTARY: Facebook is finally coming to the realization that they must file for an IPO or have to disclose their financial information. The IPO may window may also be closing more quickly than everybody thought.
In a blog post dated November 27, 2011, I wrote that Facebook would have to eventually charge users because of what I considered a flawed ad-supported revenue model, potential loss of Zynga which uses Facebook as a platform for their social games, and the reality that the social giant has reached a critical inflection point when growth in users in no longer exponential, slowing down due to market saturation, and the affect this will have on their advertising revenues.
Facebook also needs to look in their rear view mirror and contend with Google+, Google's social network launched at the end of June.
As of late, Facebook has not been all that impressive and committed numerous blunders:
- Facebook reached 800 million in users, but has not been able to fully capitalize on their huge user base and dramatically increase their advertising revenues, which comprises 93% of their total revenues. In fact, eMarketer, reduced Facebook's year 2011 advertising revenues forecast from $4 billion to $3.7 billion.
- Facebook is still blocked from entering China, a huge potential market that could reach $5 billion in online advertising by 2015. Facebook is completely locked out.
- Facebook is facing significant resistance from large national TV advertisers, who don't believe Facebook offers high enough ROI's to justify transfering their advertising dollars to social media. 50% of small businesses don't do any advertising on Facebook.
- Facebook shutdown Facebook Places, their location-based check-in service and surrendering that market to foursquare, the LBSN market leader.
- Facebook shutdown Facebook Deals, their daily deals service and surrendering the daily deals market to market leaders Groupon and LivingSocial.
- Zynga, the social game maker, has plans to build their own game site and is hinting at leaving Facebook. Zynga also filed for an IPO, and their profitability has been severaly impacted by having to pay 30% of their revenues from the sale of Facebook Credits to Facebook. The handwriting is on the wall.
- Facebook just settled with the Federal Trade Commission over numerous privacy violations. They will now join Google and Twitter to go on 20-year probation and face annual privacy audits.
Keep in mind that not a single startup that I have covered, from Angie's List-to-Groupon-to-Pandora-to-Yelp-to-Zynga ever came close to their estimated revenue numbers. Nearly all of them also lost money. Such is the case with many of today's internet startups.
Groupon was the biggest money loser of them all, yet they had a fairly successful IPO. I also covered LinkedIn, even wrote a LinkedIn IPO nine-part series criticizing their valuation, but they surprised me with a profit when they filed their S-1, but their profitability has not been what I call stellar.
Incidentally, Groupon and Pandora are all now selling below their IPO price. Pandora which came out at $12.50, and went to $15.00 has collapsed, and is now trading at $10.52. Groupon, which came out at $17 per share on their IPO day, ended trading at $31.54, but has also collapsed, and is now trading at $15.25.
LinkedIn, whose stock sold at $45, then went to $122 and ended their first day of trading at $94.25, has had a series of ups and downs, and at the end of trading day today are now at $60.00, their lowest price since the IPO. That's a loss of one-third their market capitalization since their IPO.
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Look, I'm not saying that the same fate that has hit the above startups will also hit Facebook. Unless the stock market goes to hell-in-a-hand-basket between now and the start of Q2 2012, a distinct possibility given the sovereign debt problems in the Eurozone, slow U.S. recovery, and unsettled budget deficit by Congress and automatic cut of $1.5 trillion over 10 years. Facebook should have a very successful IPO, but a lot will depend on their "real" numbers and prospects for the future.
Investors will have lots of questions: Do they really have 800 million users? How are their monthly average users trending? What were their real revenues and earnings? How many shares are going to be floated? What are their plans for that $10 billion? If they expect to raise $10 billion, that translates into about 10% of the total outstanding shares. Do I think Facebook can go to $100 a share on their IPO date? Yes, I think that's a distinct possibility. The Facebook Halo Effect and investor exhuberance at its best.
But, with that kind of IPO, expectations will always remain very high for the social network giant, and any softening of revenues, loss of Zynga or other screwups, could spell disaster.
In conclusion, Zuck has not impressed me very much with his management skills and their strategy has been nothing short of a failure, in spite of this, Facebook shares are now selling at $30.00, but have shown some evidence of softening in the secondary market.
Courtesy of an article dated November 28, 2011 appearing in The Wall Street Journal
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