Facebook's Initial Public Offering - Essay Example

Facebook IPO Your name Subject Date An Initial Public Offering (IPO) is an act in which a privately owned company sells its shares to the public on the stock exchange. An IPO helps a privately owned company to raise funds which in most cases is used for the development of the company and at the same time managing to maintain control over the affairs of the company. Initial public offer is the first presentation of stocks to the public by a private company with an aim of raising additional capital or becoming publicly traded. It’s a risky investment since the demand and the resale value of the stocks is uncertain. A case study of Facebook Inc initial public offer will help understand the whole process in the New York Stocks Exchange (NYSE). Facebook Inc is a social networking service provider that commenced in February 2004, providing Facebook social networking services. Currently, the company has more than one billion active subscribers, more than half accessing their services via mobile phones. Recent Facebook’s IPO was a clear indication of how hard it may be to make a decision on when to acquire a newly released company’s stock.  Other social networking companies like e-Bay, Yahoo!, and Linked-in had very successful entry in the public stock market however Facebook Inc did not depict a similar trend on their initial day of trading. The company held its initial public offer (IPO) on May 18, 2012. The IPO was one of the biggest in technology, and the biggest in Internet history, with a peak market capitalization of over $104 billion. Media pundits called it a “cultural touchstone” (Warren Olney, 2012). Mark Zuckerberg the Facebook's founder and chief executive had for a long time declined to trade the company’s stock publicly, and also rejected a number of offers after Facebook's initiation nevertheless, it accepted private investments from companies- especially technology related firms. As the number of shareholders surpassed the 500 target, the company had to go public (Felix Salmon, 2012). The founder however controls the operations and management of the company, despite its being a public company. Facebook IPO The much anticipated Facebook IPO was undertaken in May, over the years there have been speculations of a Facebook buyout. The value of Facebook as a business was mainly valuated by its user’s data; hence a large percentage of facebook’s revenue comes directly from selling users data. Facebook filled its IPO on 1st February 2012, Facebook’s IPO was widely accepted and there was a general feeling of optimism surrounding the IPO and this was experienced even through the road shows which commenced on May 7th 2012. Facebook IPO was widely anticipated by investors and this was evidenced through its target valuation which was valued over 100 billion.On may 18 2012 Facebook introduced its stock opening on the stock exchange which was valued at $38 , with only half a minute gone over 80 million shares had been traded, and on the close of the first day of trading 458 million shares had been traded, with the stocks reaching a high of $45 per share but at the close of the market the stock price was disappointing at $38.23. There was technical delay at NASDAQ causing an operational delay of thirty minutes before the opening the opening stocks were traded. The amount of IPO shares was the cause of the technical delay with the order of trades commencing before the specified time. This operational delay caused many of the traders to get their shares cancelled or delayed. Facebook was required by U.S corporate law to go public and this is due to the fact that by early 2012 it had over 500 shareholders. In this case for technology companies to fully appreciate the value of their business they have created it is essential to make it a public company. The IPO process as it applied to Facebook An Initial Public Offering (IPO) is the first time that a company which was private can sell its shares to the general public. In most cases, companies usually sell between 20% and 30% of their shares but this varies depending on the company industry, country, and stage of growth. Facebook made an offering of 11% of its shares for the public. A low percentage like the one that was made by Facebook would normally worry investors but because the company was a ‘hot’ company, investors bought shares anyway. The Facebook Inc. IPO was the largest technology IPO ever offered in the history of mankind and the third largest in the United States of America, after Visa in 2008 and General Motors in 2010. Facebook raised $16billion from a sale of 421.2 million shares; the company was valued at $104.2 billion making it one of the most costly companies in the world. Mark Zuckerberg’s social networking website, Facebook, which started in a Harvard dormitory, has seen tremendous growth since it was officially launched in 2003. “Facebook is one of the world’s biggest and most recognizable brands in the world. More than 500 million people in 180 countries are members of the website, and the numbers are growing every day.” (Sutherland, 2012, p.4) There is no denying the magnitude of the impact that Facebook has on the world and the magnitude of the company itself, the IPO was sure to be a global phenomenon. The body charged with the power to decide if a company should go public in most cases is the Board and major shareholders. Facebook’s CEO, Mark Zuckerberg, owns 56% of Facebook’s rights and 28% of the stock, he therefore has more leeway and power to make decisions concerning the company without necessarily notifying the board; Zuckerberg made the decision to buy Instagram without prior information to his Board. An IPO being a major event for a company and an intricate one at that, Facebook’s CEO had to pull in the Board and stakeholders into the process. In an IPO process, companies reach out to bankers asking them to pitch for the business. After this invitation to pitch, the company chooses banks for two roles, book runner roles and co-managing roles. A book runner in an IPO is the lead manager and main underwriter in a new equity and essentially charged with the responsibility of handling the books. Co-managers on the other hand are complementary to the book runners and they provide research assistance on the stock and oversee provision of aftermarket support. Most IPOs usually have one or two bankers as book runners and a few other banks as co-managers. Facebook has twelve (12) banks as co-managers; this number is because of the size of the company and the prestige that comes with the IPO, and Morgan Stanley the book runner. The next stage in the IPO process involves meetings to hold discussions between lawyers, accountants, company management, book runners and co-managers. The discussions are usually to delegate duties and figure out the logistics of the IPO. This is followed by due diligence processes, legal, financial and tax, industry or market due diligence and customer calls. It is worth noting that Facebook does not have typical customers, its customers are large advertisers and key partners for example, Zynga. After these processes, the S-1 Registration Statement is filled. The name of this registration varies from one country to the next. When Facebook filled its S-1 form, the government site crashed due to the heavy amount of traffic it got from visitors due to its popularity. The Facebook IPO process was a widely watched and followed process being a large company and a popular one. After the S-1 is filed, pre-selling the offer takes place; the company picks investors to market to, after which the S-1 might go through amendments to include a revised price range advised by the responses and feedback by the investors. Facebook revised its price range from $28 to $34 to $38. The final price was decided at $38. The general public can begin buying and selling shares after the book runners and co-managers have allocated shares to investors. The Facebook IPO was mostly beneficial to its Venture Capitalists, book runners and co-managers, and of course, the CEO much more than it were to the general public. This is usually the case with most IPOs but the difference is hardly ever as pronounced as it was with Facebook’s IPO. Peter Thiel, a venture capitalist on Facebook’s Board invested $0.5million in the company in the year 2004. He sold 5.6 million of his shares in the IPO which would make him $640million. He still has left 39.4 million shares worth $1.06 billion. Facebook paid its bankers a 1.1% fee which equaled $176 million. Overall, Facebook’s ‘insiders’ made $16 billion. On the other hand, the share value dropped by a half within a week of trading, so the general public did not reap what they had hoped to given the stature of Facebook. Facebook Inc.’s Stock Performance since the IPO On May 17th 2012, the official opening of Facebook Inc.’s IPO, share price was $38, as of October 15th 2012, share prices fell to $19.52. The company’s IPO was 421 million shares, four months after the IPO Facebook fell by 7%. Over forty pending lawsuits have been filed against Facebook Inc. by shareholders who have highlighted the issue about the unfairness of IPOs. “Bankers engineer IPOs to maximize profits at the public’s expense.” (Gustin, 2012) Most analysts, even the company’s CEO have attributed the weak performance of Facebook’s stock to an inability to monetize its customers on mobile devices. Facebook’s weak performance disappointed everyone who was closely watching the technology industry and had hoped to capitalize on the new innovative idea that was social media. This failure affected other social media stocks including Groupon Inc which fell 7% and Zynga Inc. which fell 13%. The magnitude of Facebook as a company has been seen in how it has influenced the failure of other companies in the same industry with the failure of its own stock performance. Glitches that were experienced when trading began at NASDAQ attracted the attention of the Securities and Exchange Commission (SEC) which launched an investigation of the technical problems to prevent future repeat incidences. “The SEC Facebook IPO probe was said to find no wrongdoing so far.” (Farell, 2012) Some analysts have said that the spectacle and hype that was generated by Facebook’s IPO was misleading as individual investors imagined they would rake in high returns fast based on the company’s popularity and size. The analysts continue to state however, that, those individuals who are interested in the short term performance of Facebook are in a lot of trouble. Facebook, the analysts say, is a long term investment that is a smart one for those who are patient enough. The weak performance of the company has raised issues of reforming IPO policies as there have been greatly underwhelmed investors and increasingly agitated ones who have proceeded to file lawsuits and order investigations on the company. This group of angry investors does not buy into the analysts’ theory of long term investments. It is imperative to take into consideration the fact that the amount of excitement that was generated by Facebook’s IPO may have caused some hysterical investment by certain individuals who expected more than was realistic and understood less than was necessary to understand. Facebook Inc. is a popular and large company, but popular and large companies do not necessarily make for great investments. The fact that the company has not yet figured out a way to monetize its mobile customers, who are the largest group of its customers, should have worried anybody, apart from the insiders, and made them think twice about purchasing the shares. Unless one was in it for the long haul, one should not even have looked at Facebook shares. Facebook’s stock market performance since The opening stock price was $38 per share now trading at $21.16 in midday trading. So it’s fair to say that Facebook’s stock after the IPO has not done well amid speculation over its ability to keep growing revenue. During the subsequent days after the IPO, Facebook saw a steady decrease in its stock prices and by June 6th investors had lost about $40 billion. The IPO HAD A Negative impact on individual investors who in this case were mostly Facebook employees but had a positive impact on venture capitalists. Despite the losses the company has made the online advertising is still performing well. Facebook released its quarterly financial report as a public company, In the financial report it is reported that Facebook has made a net loss of $157 million, these losses where mainly due to the expenses accrued during the IPO process. Mark zuckerberg who is the founder of Facebook has been under intense scrutiny ever since the IPO, with angry investors suing the company. The share price has halved ever since the IPO, Mark zuckerberg admitted that the Facebook’s debut into the stock market was disappointing but has reiterated that the company will “bounce back.” There were concerns that Facebook would not be flexible to a change in mobile devices, and this caused a significant drop in the share price. Mark zuckerberg lamented on the IPO rules which made it difficult to update people on its mobile developments, he gave a good account of the company laying to rest the concerns the investors had and as a result within the hour after this affirmation Facebook share price rose by 4%. Global IPO activity since 2001 The global IPO activity has performed dismally since 2001 and this is due to a couple of factors. The biggest factor in this case is volatility in equity markets considering it has become one of the most closely monitored market indicators. The management of execution risks is also one of the concerns from investors with a large number of companies withdrawing from IPOs due to rampant changes in pricing conditions hence leading to potential companies which are planning an IPO to be worried if they will be able to finish their public offering. With a large number of IPOs being withdrawn or delayed. The bar graph below shows the capital raised and the number of deals from the year 2001 to 2011. The graph clearly shows the fluctuations in the global IPO activity ever since 2001 where the capital raised was $99 billion and had 876 deals compared to 2003 where it raised $58billion and had 812 deals. In 2007 was arguably the best year since 2001 for global IPOs with a total of $295 billion capital raised and with a number of 2014 deals made with the year. The debt crisis in Europe combined with the slow economic indicators among other nations, have severely affected the global IPO market in the year 2011. The global IPO markets have depicted remarkable growth and development since 2001 with economic recovery acquiring speed and more profitable companies accepting listing in the stock exchange (Maria pineill, 2011). Over the years IPO companies alongside their potential investors have been able to cope up with the ever changing market environment, one in which uncertainty has become a norm. The increasing growth of emerging markets and the rise of China, especially, in major sectors such as technology, mining, metals and healthcare have been backed by the growing private equity and venture capital backed by IPO. Despite the high volatile and poor state of the economy in the recent past countries such as USA has shown its resilience in the IPO activities. Currently, hot sectors entail technology, real estate, oil and gas, pharma and consumer retail. Private equity will play a vital role in the IPO market and it’s also expected that there will be IPO curves and spin-offs. In your opinion what has been the most successful IPO in that time? Justify your answer. Facebook is the most successful IPO in history as stated earlier. The main purpose of an IPO is to raise funds, and Facebook did precisely that. On its opening stock price within the first thirty seconds 82 million shares had been traded and by close of market 567 million shares had been traded. Facebook managed to raise the maximum amount of money at minimum cost and this essentially underlines the core of every profit making company, Minimization of costs or maximization of profit. And through the IPO Facebook managed to do this and become the most successful technology company in history, and the best part is they still managed to have control over the company by having majority voting rights. Facebook also made history by offering their shares at the highest price and paid the lowest fees in investment banking history. Facebook managed to raise about $16 billion from the IPO. You might argue that Facebook had a significant drop in its share price but if you look at the facts or the prospectus, in that case you will realize that investors paid 100 times more earning for shares in the company, and as a result driving the share price very high. In the case of Facebook it means they sold their shares for much more than they were worth. There was a general sense of optimism even before the opening stock and this created a lot of hype and this is because Facebook is very popular with 9% of visitors online in the United States of America. With the success of Google and other social sites Facebook’s introduction to NASDAQ was prone to make an impact. Therefore considering the facts, and from a business point of view in my opinion, Facebook is the most successful IPO in history. Conclusion The most successful IPO in the time has been Facebook Inc. IPO since it’s the big story which has broken record in the technology industry generating a total of $104 billion. Secondly the subsequent trading in Facebook stock performs well with a promising future which can be emulated by other sectors. Reference List CNBC, 2012, The 5 Best and Worst IPOs Since 2001.[online] Available at:http://www.cnbc.com/id/47448975/The_5_Best_and_Worst_IPOs_Since_2000 [Accessed 7th November 2012] Ernst & Young, 2009, Shifting Landscape – Are you Ready? Global IPO Trends Report. [online] Available at: http://www.scribd.com/doc/28140977/2/Global-IPO-activity-has-more-than-halved-since-2007 [Accessed 7th November 2012] Evelyn M. Rusli. Facebook looks hard at NASDAQ, The New York Times. 2nd July 2012. Farell,G., 2012, SEC Facebook IPO Probe Said to Find No Wrondoing So Far, Bloomberg,[online] Available at: < http://www.bloomberg.com/news/2012-10-19/sec-s-facebook-ipo-probe-said-to-find-no-wrongdoing-so-fa.html> [Accessed 7th November 2012] Gustin, S. , 2012, After Facebook Debacle, Can Investors Trust the IPO Process?, Time Business & Money,[online] Available at: http://business.time.com/2012/06/26/after-facebook-debacle-can-investors-trust-the-ipo-process/ [Accessed 7th November 2012] Sutherland, A. , 2012, The Story of Facebook, New York, Wayland Maria Perelli, 2012. Global IPO trends 2012. Ernest & Young. Hannah Langworth, Facebook and its IPO: the full story. 27th July 2012. Facebook raises $16 billion in IPO, New York Times, and 17th May 2012. Read More