Business free essay: Facebook IPO
Reasons for Facebook IPO
Facebook engaged the public in an IPO in order to raise funds to continue its business presence amid competition from other technology intensive products in the market today. Borrowing from the success of other businesses in the market today, an organization will find it economically wise to diversify its source of capital, with invitation of the public to own the organization making vital contribution in that respect. In a technology driven sector, competence and competitiveness of the organization continue to rely on investment in innovation (Investopedia para.2). Facebook is awake to the fact that the magnitude of competitiveness and continued market exploitation requires astronomical funding. Spreading the cost and associated risks among many owners in an IPO makes it easy to raise capital for development and expansion as well as lower risk levels.
Regarding the exact capital needs that Facebook might have on its implementation list may prove a speculative matter for now. However, based on the operations environment at the disposal of the corporation, it is possible to identify possible investment needs that Facebook would find immediately necessary to remain competitive. Among the most specific capital needs, on why Facebook needed to upgrade its capital sources from private to more public sources includes an upscale of its computer equipment to enable hosting of an increasing numbers of customers. Using the trend of users’ growth over the past few years backed by a growing market niche tremendously tapping from corporate marketing revenues and customer driven demand makes Facebook among the most powerful social media tools. Market studies and research on Facebook experiences a dramatic link with social media and Facebook gains a huge proportion of its revenues from such marketing charges, which justifies expansion of the opportunity (Investopedia para.4).
Alternatively, such expansion demands will require an upgrade from its current labor force to sustain its functionalities and further provide innovative products to keep with the pace of the rest of technology products to remain competitive. Operations growth at the company must translate into significant staffing needs and indications from CNET believe that a workforce of about 9600 will be needed in the next several months. In addition to the mentioned expansion needs, diversification of revenue generating functionalities of the social site will also require significant funding, to keep up with other internet service trends popular among users such as video, music, applications and product sales. Perhaps in the future, Facebook will consider making acquisitions in order to expand through relevant ventures, to enable diversification and constant growth.
Before the IPO, Facebook’s overall ownership structure comprised of 1.96 billion shares worth of US$66.6 billion. Among the main owners before the IPO included Mark Zuckerbeg owning 27.3 per cent of the shares valued at US$18.2 billion, Accel Partners with 10.3 per cent valued at US$6.9 billion and Dustin Moskovitz owing US$4.5 billion worth of shares equal to 6.8 per cent. DST Global owned 6.7 per cent worth US$4.5 and other Investors having 48.9 per cent valued at US$32.6 billion. The arrangement to have the IPO implied that each of these classes of owners would part with a certain proportion of their ownership for the public to buy. The existing shareholders sold shares worth US$5.4 billion and an additional pool of shares worth US$6.1 billion was created to amount to US$11.5 billion sought from the public in an IPO. The valuation of each share at US$38 IPO price explains the capital generation targets and capacity of the IPO. Apparently, the disposal of the shares by the existing investors must have generated a shift in ownership to pave way for public ownership. However, ownership patterns did not change significantly after the IPO, with considerable ownership remaining among the initial owners. The main ownership remained at Other Investors (41.6 per cent), Zuckerberg (23.6 per cent), Accel Partners (7.6 per cent), Moskovitz (6.3 per cent) and DST Global (4.9 per cent). IPO quoted price shot up immediately to $42 on the initial stages but later dropped significantly below the IPO, raising speculation on the actual valuation of the company’s shares (Kissmetrics 1).
Timing and Success of IPO
The most appropriate timing for an IPO should ordinarily be at a time when the company is likely to achieve in attracting public interest. In view of the appropriateness of the timing of the Facebook IPO, it was perhaps the best timing to achieve the targets set forward before the IPO. In terms of the immediate financial achievements at Facebook, taking advantage of the public confidence existing at that time would only enable such outcomes for the company. Apart from the share valuation hitches as the market tries to adjust and stabilize in the market, the actual capital targets expected justified the timing as appropriate due to a full subscription recorded (Hutchinson para.1). In terms of revenues, Facebook managed to make a dramatic rise from US$777 million in 2009 to over US$3.7 billion in three years. In the same period, profits rose from US$229 million to US$1 billion, with the last trading period alone recording a 65 per cent growth. Comparing the need to target opportunities in market diversification and innovativeness, an IPO at that stage seemed the most promising alternative to raise revenue for further development.
The success measure for the IPO extends far beyond the immediate reaction of the market in share valuation, to include future projections and the prior targets set for the IPO. In terms of Facebook’s IPO, the value of the activity fell back to the company as opposed to many failed IPOs where bankers and brokers make money at the expense of the seller. According to Roth (para.2), reports indicate that bankers participated in the purchase of the stock, sending signals of their faith in the US$38 valuation. Full subscription also enabled the company to realize its targets, whether set higher or not did not appear to trouble the market. The actual fluctuation from real value is minimal indicating that Facebook was correct to value its IPO and avoid sending money in the wrong direction other than its kitty (Worstall para.3).
Roth, Allan. “Why Facebook’s IPO was a Success.” Web. 21 May, 2012. (www.cbsnews.com/m/8301-505123_162-57437964/why-facebook-ipo -was-a-success/)
Investopedia. “Why Facebook Needs More Cash.” Web. 22 May, 2012. (www.forbes.com/sites/investopedia/2012/05/22/why-facebook-needs-more-cash/)
Hutchinson, Dave. “The Facebook IPO.” Web. n.d. (http://www.davecfp.com/Invest/FACEBOOK%20IPO.pdf)
Kissmetrics. “Facebook: Dissecting the Numbers.” Web. May 2012. (http://blog.kissmetrics.com/wp-content/uploads/2012/05/facebook-ipo.pdf)
Worstall, Tim. “The Incredible Success of the Facebook IPO,” Web. 30 May, 2012. (http://www.forbes.com/sites/timworstall/2012/05/30/the-incredible-success-of-the-facebook-ipo/)
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