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Facebook IPO Disappoints « Back
Selina Harrison, June 2012
After much anticipation, Facebook, the world’s largest social network, launched its initial public offering on the NASDAQ on 18 May, valuing the business at $104bn. However, despite expecting a first day surge in share price, investors saw Facebook’s stock close at $38.23, just 0.6 percent above the IPO price. The lacklustre performance of its shares on the exchange in the days after the IPO has led to questions about Facebook’s ability to generate profits and returns for shareholders going forward.

Facebook was founded by ex-Harvard University student Mark Zuckerberg eight years ago. With over 900 million users worldwide, Facebook has grown to become the world’s most popular social network. Not only has it changed the way in which hundreds of millions of people around the world communicate, Facebook makes most of its money from advertising and has transformed the way companies advertise to existing and potential customers.

Build up

Speculation that the company was mulling a stock market listing first began to flare in January 2011, when just a few days into the new year it was announced that Goldman Sachs and private equity firm Digital Sky Technologies had invested $450m and $50m respectively in Facebook, valuing the company at $50bn.

A few weeks later, a 101-page investor’s prospectus announced that Facebook would go public, but not before the end of 2012. However, at the beginning of February 2012 Mr Zuckerberg announced plans for the company’s IPO.

Facebook filed its intention to float with the Securities and Exchange Commission on 2 February. Papers revealed that Facebook’s net income in 2011 rose 65 percent to $1bn on revenues of $3.71bn. In an effort to raise $5bn from the IPO, in the following months Facebook went on an acquisition spree aimed at increasing its value prior to its stock market debut.

At the end of 2011, Facebook had just 56 US patents. To protect itself in the ongoing tech sector patent wars, during March and April the company acquired 750 patents from IBM, and then spent $550m buying 650 of the 925 patents Microsoft had recently bought from AOL. In April, Facebook also announced it was to buy the photo sharing app Instagram for $1bn.

Following an investor road show in the US, in the days before the IPO demand for Facebook shares was so strong that, from initial range of $28 to $35 per share, the company upped the range to $34-38, valuing it at roughly the same as US giants Amazon and McDonald’s. Facebook also decided to sell 25 percent more stock than originally planned, upping the sale to around 421 million shares from a planned sale of 337.4 million.

Mixed results

When the day of the offering finally came, expectations were somewhat squashed.  Although shares in the firm initially rose to $42, they quickly fell back and closed barely above the company’s initial pricing of $38. Even so, despite the miniscule increase in share price on the day, the float managed to raise $16bn – more than three times the profit Facebook investors had initially hoped for. But in the days after the IPO, the price of the company’s stock declined by 10 percent, raising questions about how the company will generate profit in the future.

In April, Facebook had reported its first ever drop in revenue with its first quarter profits declining to $205m from $233m a year earlier. Further, although Facebook makes money, profits are currently around 1 percent of its market value. Despite holding a level of personal information on its users that advertisers dream about, Facebook only generates about $5 a year per user. Although the potential revenue from online advertising is huge, the company needs to tweak its strategy. There are concerns that, now the company has to answer to shareholders, there will be a greater emphasis on advertising to generate profits – with unknown consequences. Facebook has identified mobile devices as a key area for revenue growth, but observers question how much room there is for advertising on such platforms. Indeed, in the days leading up to the IPO, General Motors added to these doubts by saying that it would no longer pay to advertise on Facebook.

There are other factors that may impact Facebook’s share price. As well as an ongoing counter lawsuit with Yahoo for patent infringement, on the day of the IPO a class action suit was brought against Facebook in the US for “improperly tracking the internet use of its members even after they logged out of their accounts”. While the outcome of such cases may damage Facebook’s reputation over the longer term, in the near term there are deepening concerns that demand Facebook shares may also be hit by Europe’s deepening debt crisis.

On 18 May, Morgan Stanley, underwriter of Facebook’s IPO, stepped in to prevent the stock from falling below the $38 mark. However, should it cease to support the stock indefinitely, Facebook may join the list of online firms which have stumbled following over-hyped IPOs.

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