What Will Facebook's IPO Really Mean?

  

 

We've heard the rumors all day. Facebook may file for its initial public offering (IPO) on Feb. 1. Estimates place the value of the company between $75-$100 billion, meaning that Facebook could raise as much as $10 billion in the IPO, making this the highest earning IPO of any technology company in Silicon Valley history. But aside from the fact that you may soon be able to purchase shares of stock in this company, what will Facebook's IPO mean for the industry, investors, and you?

The Industry

*There is such a buzz around the Facebook IPO that it is likely investors and fund managers will want to buy the stock in order to be able to say they have it. But at $100 billion, Facebook would have a market valuation that is four times that of Google when it went public in 2004. Even at the more conservative valuation of $75 billion, Facebook would be trading at a price-to-sales ratio at IPO of 19.7X, meaning that it would be valued at almost 19.7 times the amount of revenue it made last year. To put that into context, this is a much bigger multiple than that of Apple, which has a price-to-sales ratio of 2.2 times and Google, which has one of five. The point, according to Wired.Co.UK, is that Facebook will need to generate a lot more revenue over the coming years in order for shares bought at that valuation to make money for investors.

*Wired.Co.UK predicts that if the Facebook IPO does take place, it could be significant for other social networks, by providing a strong indicator of confidence in the market. The Huffington Post already claims that shares of social media peers from RenRen to LinkedIn have been buoyed by the fierce competition on Wall Street ignited by rumors of this offering.

*“Facebook is an ecosystem, more than just the company itself,” comments Lorraine Ruckstuhl, corporate director at Barclays Corporate TMT. “Over the past few years we have seen hundreds of ‘new media’ businesses built around the social network – from pure consultancy to advertising platforms and services: it has been one of the most vibrant sectors in the market.  . . . The results of a Facebook IPO will have short- and long-term implications for them all” (Wired.Co.UK).


Investors

*The high profile nature of the Facebook IPO has meant that investment banks have been in serious competition to be involved in this deal. As a result, it is believe that this IPO will set a new standard for how low investment banks are willing to go with their advisory fees in order to win big business. Morgan Stanley and Goldman Sachs have been squabbling over the rights to act as the underwriter on this deal for as little as one percent of gross proceeds. Wired.Co.UK states that smaller deals generally fetch around seven percent, while other large deals tend to be two or three percent.

*The winners of a Facebook IPO will be many. Aside from Zuckerberg and the firm’s early partners, angels and employees, venture capital firms like Greylock Partners, Accel Partners, and Meritech Capital Partners will have boasting rights to arguably the most prescient investments in history (Forbes.com).

*Goldman Sachs will also come out a big winner. In January 2011, the firm independently purchased a $450 million stake in Facebook, at a $50 billion valuation. The New York Times speculates that if Facebook achieves a market value of $75 billion or higher, Goldman’s investment will grow 50 percent or more.

*According to Forbes, the notoriously secretive company, guided by a CEO who has maintained controlling power against all odds, will soon be required to be more transparent than ever before. This development will finally supply many of the missing details investors have been hungry for, as well as help to answer questions about the overall social media market (CNN Money).

You

*As Facebook begins to play a major role in the Nasdaq, it will have to deliver even more targeted ads in order to create more value for advertisers (Wired.Co.UK). Consequently, you might feel increasingly stalked by the site, which could result in you using Facebook less, or not at all; (although we know that you would have to feel creeped out beyond measure for this to happen). Facebook will need to find a way to put the customer experience first, despite the demands that will result from an IPO.