Facebook Raises $16 Billion in I.P.O.
Posted by Ram Kumar Shrestha on May 18, 2012
BY EVELYN M. RUSLI AND PETER EAVIS
Facebook pulled it off.
As investors raced to get shares, the sprawling social network raised $16 billion on Thursday, in an initial public offering that valued Facebook at $104 billion.
The I.P.O. signals a rapid evolution for the company. In just eight years, Facebook has gone from a scrappy college service founded in a Harvard dormitory to the third-largest public offering in the history of the United States, behind General Motors and Visa.
Investors, who are paying $38 a share for the offering, now consider Facebook more stalwart than start-up. At $104 billion, the social network’s market value is higher than those ofMcDonald’s, Citigroup, Amazon.com and all but a handful of other American companies.
“Facebook is here to stay,” said Navin Chaddha, a managing director of the Mayfield Fund, a venture capital firm. “It’s a virtual economy where people are spending more time than any other Internet property.”
Facebook will be celebrating the occasion with the same style on which it built its reputation.
At 7 p.m. on Thursday, the social network will kick off its 31st “hackathon,” with engineers coding into the wee hours of the night, employees amped up on Red Bull and staffers-turned-DJs playing their tunes, according to a person with knowledge of the event. Part work, part fun, the Facebook tradition, which will take place an area of the company’s campus known as Hackers Square, encourages employees to do what they do best – brainstorm, design and create.
On Friday, Mark Zuckerberg, the baby-face founder known for his trademark hoodie sweatshirt, is set to ring the opening bell for the Nasdaq from Facebook’s headquarters in Menlo Park, Calif., surrounded by executives, engineers and other employees. Shares of Facebook, which will trade under the ticker FB, will start selling to the public later in the morning.
For now, Facebook seems to be a must-own stock.
As the largest player in the social media arena, Facebook has been enjoying blue-chip status from the start, with investors worried about missing out on what could be the next Google. The social network will also soon join Nasdaq 100, the technology index, so money managers looking to track the benchmark will join the swell of demand in the coming months.
The frenzy for Facebook was on full display during the two-week roadshow leading up to its I.P.O. Across the country, investors packed hotel ballrooms to hear Facebook executives give their pitch. Bankers drew up waiting lists for the events, which included stops in New York, Boston and Palo Alto.
The tour yielded an avalanche of orders. As investors lined up for shares, Facebook raised its price range and increased the size of its offering. The company is offering 421.2 million shares, 25 percent more than originally intended. Given the strong demand, the bankers, led by Morgan Stanley, JPMorgan Chase and Goldman Sachs, are widely expected to sell 63.2 million shares.
With the supersize offering, Facebook’s insiders are taking the opportunity to cash in some shares. The group, which includes early owners and more recent investors, will now collect an additional $3 billion or more from the I.P.O. Goldman Sachs, for instance, which took a stake early last year, is selling about a third of its stake. Peter Thiel, the contrarian venture capitalist who was one of Mr. Zuckerberg’s first backers seven years ago, has more doubled the number of shares that he is offloading, to 16.8 million shares.
Facebook landed its I.P.O. in the face of doubts about the company’s main source of revenue: advertising.
After years of courting Madison Avenue, Facebook is still trying to persuade companies to not only build a presence on its site, but spend real dollars on advertising. Just as important, the company has to find ways to insert advertising into its users activity without making the site cluttered or irritating.
Inconveniently, General Motors, one of the country’s biggest advertisers, said this week that it was dropping its entire ad budget for Facebook. That amounted to $10 million, a drop in the ocean for Facebook, but it exposed the social network’s Achilles’ heel. Investors, experts caution, will have to be patient for Madison Avenue to come around.
“It could take many years to calculate Facebook’s impact,” said Martin Sorrell, the chief executive of WPP, the large advertising company. “There’s a lot of pressure for them to monetize their content and demonstrate productivity, but you can’t do it overnight.”
In addition, Facebook may struggle to generate advertising revenue from its mobile sites. Last month, it paid about $1 billion for Instagram, a mobile photo-sharing application that has plenty of users but not a scratch of revenue. Given the explosion of smartphones and the increasing amount of time those devices command, solving the mobile question is widely seen as a necessity not an option for Mr. Zuckerberg.
For now, though, investors are willing to give Facebook the benefit of the doubt.
At the offering price of $38, Facebook is set to trade at more than 100 times its earnings for the last 12 months. At that level, investors assume the company will be far more profitable than the rest of corporate America. The Standard & Poor’s 500-stock index trades at 14 times earnings.
Facebook’s fans believe the rich valuation is warranted, given the company’s prospects for earnings. The company’s net income could be $4.5 billion in 2014, up from $1.2 billion last year, according to Ken Sena, analyst at Evercore Partners.
But Facebook’s results will depend on whether companies are willing to shell out their marketing dollars for a chance to reach the social network’s 900 million users — and its not clear advertisers will be willing to pay.
While Facebook is often compared to Google, the search giant has a relatively straightforward, and proven, method of generating most of its advertising revenue. It matches ads with what people are searching for. By contrast, Facebook has the potentially more demanding task of finding ways to insert ads into users’ activity without cluttering their experience.
Bullish investors point to Facebook’s profit margins, which are much bigger than Google’s. “A lot of people don’t understand how profitable Facebook is,” said Thomas Vandeventer, manager of the Tocqueville Opportunity Fund, which already owns Facebook shares. In 2005, Google’s operating profit amounted to 34 percent of its revenue. Last year, Facebook’s were 47 percent.
In addition, Facebook user activity provides the company with a richer array of data than Google may be able to garner from its users. Once the company works out ways of utilizing this data for advertisers, its revenue could balloon. Mr. Sena estimates that Facebook made only $9.50 in ad revenue per user in the United States last year, compared with $63 at Google. Just closing that gap by a small amount, Mr. Sena said, could bolster Facebook’s revenue significantly.
The question is whether the company’s management will make it work.
Facebook, in many ways, is like a mining company sitting on valuable deposits that are hard to dig up and refine. At a market value of $104 billion, investors believe Facebook is sitting on gold. But the share price could tumble at any sign that Facebook’s management can’t unearth it.