Facebook's path to IPO

"Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected"  Mark Zuckerberg, CEO of Facebook Inc

CEO of Facebook ,Inc. Mark Zucketberg made prospective shareholders aware that the Facebook business is different to other businesses by a form of a  letter.  The prospectus of the company declares their intention to go on public to Security exchange control (SEC), Washington.

It is a big step for a company to 'go public'. As a result company need to undertake major legal requirements and the board holds a great responsibility as the company step on official listing. Directors are required to prepare prospectus or listing particulars about the firm, including accounts, details of property valuations, details of major contracts and risks. Additionally, investors demand regular dividends and this may put pressure on directors. There is also a possible loss of autonomy within directors as investors become important. On the other hand  the quality of the company is also measured by its suitability, such as stable management team, having the necessary range and depth. Also, timing of the flotation, healthy balance sheet with sound financial control mechanism is vital. (Arnold, 2008)

We all know what Facebook is. Uses of Facebook form as its main products. Its revenue is mainly generated by advertising, hence the time users spent on Facebook, and their likes and dislikes, interests will be targeted for more specific advertising. Last year Facebook revenue was $3.7billion with a $1billion profits. As a private company it has raised $1.5billion of venture capital. This has been reported as one of the largest amount raised by a private company.

Facebook Inc. filed for an initial public offering (IPO) has been valued between $75 billion and $100 billion, while Facebook hoping to raise $5 billion when it begins selling shares.The company ticker is "FB". As per reports it has a high probability to trade on the New York Stock Exchange over Nasdaq Stock Market. According to US law once a private company have 500 or more shareholders, the company will have to publish detail financial data, and this has led Mr. Zuckerberg to realized that in 2010 it would have more than 500 shareholders by the end of 2011, which would trigger a regulatory requirement that the company start publicly reporting financials. However it has now decided to go public and to gain financial benefit from an IPO.

The co-lead underwriters role has been taken up by Morgan Stanly while Goldman Sachs being the third underwriters. However In my opinion hopefully the underwriters would not have to purchase the shares while this IPO is becoming popular in the market.  

Nevertheless, the time line of  the full prospectus to be published on impact day will take around 3-6 months. (Arnold, 2008). The Impact day will reveal the Facebook valuation.

However, apart from the process of going public, I bring another argument on this IPO, regarding its overvaluation.  According to professor Jay Ritter, major companies have on average of 1:1 over IPO valuation and sales. However Facebook is at 26:1, which is comparatively high. Nevertheless in 2004 Google IPO was at 8.7: 1 .

So why did Facebook didn't raise money to finance the company by debt. Possibly it could be that Facebook, do not have assets to keep as security to borrow this huge amount. If CEO has a good plans to grow the company by acquiring other business and invest in major projects, going public is the best option where an  web based company to raise funds at its extreme popular time.   

Source :
Facebook prospectus: available at: http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm
The Wall Street Journal
The private company financial data authority, available at :http://www.privco.com ;
Forbes.com, Available at: http://video.forbes.com/fvn/inidaily/forbes-markets-desk-facebook-road-to-ipo