SOCIAL NETWORKS AND THE STOCK MARKET

Originally Published through Yahoo Voices

Facebook and the Possibility of an IPO in 2012

The Rumor mill is churning hard on Facebook doing an IPO sometime before summer 2012. a lot of armchair investors are now chomping at the bit to grab a share in what may be the last of the big dot com investments from the millennium bubble.Why would a network website that allows for social contact among a group of friends now challengeGoogle Microsoft, and Yahoo for overall Internet dominance when it has only been around for a few years?

Putting aside the movie view, the Real Facebook was developed in 2004 as a means to allow Harvard students to mingle and compare information online. It both expanded and spread rapidly and within 6 short years has become the #1 destination online for all social interactions.

In 2007, Microsoft purchased a 1.5% share in the privately held Facebook for US$240 million, which placed the website/company’s value at approximately US $15 billion overall. Since that time, various other companies and organizations have purchased parts of Facebook equity so that the overall market value of the company is currently estimated at US$50 billion.

The company is privately held, so does not have to disclose it’s revenue, income or balance sheets – thus there is no real way to measure the Real value or income of Facebook at this point. We rely upon information gleaned from sources spread far and wide, and from information generated by publicly held companies that purchase shares or do large transaction with Facebook so they can be investigated to try and determine the value of the Social Network.

Now, to the gist of this article. Is a Facebook IPO worth it? In the overall scheme of things, would a public offering of shares generate more working revenue for Facebook and also value the company higher than it’s current price?

An IPO or Initial Public Offering is a stage in a Share Trading Corporation’s life when it wants to become a public company, rather than a private company. The organization works with various agencies to determine the real value of the company, the Initial share price, and how many shares will be offered. All of which reduces the ownership of the current private shareholders by a certain percentage with the hope that the IPO will increase the overall company value such that the reduction will be offset by a dramatic rise in the held share value.

Nobody knows what the IPO share price for Facebook may be, or how many shares will be offered in their IPO. everything is guesswork at this point, however, this much is known.

The way the current market is running, if Facebook lists on the exchanges, it will be swamped with buyers and is pretty much a guaranteed riser. The only real danger is that a lot of companies may flip some or all of their initial allotment of shares to generate rapid profits. If a Facebook IPO goes ahead at say $20 a share, the companies that currently hold shares will generally be allocated a set number of public shares to offset the loss of value brought about by the IPO itself. On the first day or first few days, if the IPO share prices rises rapidly, such as with the IPO for theglobe.com in 1998, then the companies have the option to sell off their allotment of shares for the profit. In the case of theglobe.com, the IPO price was $9 – the highest price before the flipping began was $97, and the price eventually fell to $63. Although a number of investors earned significant profits, it effected the IPO by undervaluing the company and the estimates are that the company lost up to $200 million of the IPO valuation due to flipping.

A similar scenario with Facebook could result in a loss measured in the billions of dollars, and could cause the IPO to collapse into itself, reducing the effective value of Facebook and causing a loss of confidence within the company that could last for years. While I cannot see such a scenario breaknig the company, it could certainly effect it poorly with a loss of investment and revenue that can damage Facebook’s ability to continue to evolve the web property that has made it such a household name so far.

On the other hand, if Facebook does a similar process to what Google did, and does an OpenIPO of shares, then the outcome can be dramatically different. The OpenIPO process is a variant on the Dutch Auction method, pioneered by the Investment Bank WR Hambrecht + Co. It allows for a series of bids on the value of shares by potential investors. Once the investors all agree upon a price, all shares are offered at that price.

Most traditional investment bodies do not like the OpenIPO process because it defeats the backroom deals and behind the scenes mechanics that can generate massive profits; however, it tends to be measured in terms of allowing for the real value of shares to be presented, rather than an overinflated value.

Regardless of the method, a Facebook IPO will be quite possibly the last chance anybody will have to participate in a stock market float like the late 90’s and early 2000’s. I would imagine al ot of investors will buy shares in Facebook more for the chance to actually own the shares rather than looking for raw profits. When and if Facebook presents itself for an IPO remains to be seen; the investment net is ready, waiting and quite possibly drooling with anticipation, so please Mark Zuckerberg, don’t keep us waiting too long.

Sources
theglobe.com IPO http://news.cnet.com/2100-1023-217913.html cnet news archive
OpenIPO process http://www.wrhambrecht.com/ind/auctions/openipo/ WR Hambrecht + Co