Transfer Pricing Associates

‘Gambling with Facebook’- 8 IPO challenges

post Thursday April 19, 2012


1. Is Facebook really worth 75 billion euro? At the end of 2011 Facebook had a private equity of almost 3.9 billion euro at a balance total of 4.9 billion euro. These are impressing numbers, but it takes a lot of fantasy to point out the market value at 75 billion euro. Facebook announced in the prospectus that it will not pay dividend in the foreseeable future.This will only leave the possibility for investors to gain profits from rising share value. At this moment the estimated value of 75 billion is 100 times the net profit of 2011, which is extremely high. However, if the profit will double next year, the ratio will be 50 times the net profit and the year after that 25 times. The past has shown that the profit has quadrupled since 2009, which is very promising for the future.

2. How does Facebook generate revenues? What counts for Facebook as well as for many other Internet services: if you’re not paying for the product, than you are the product. Every thing you post and say on Facebook is stored and sold to advertising companies. With help of all the data people post, marketeers can easily select a target group. Last year the advertising companies paid Facebook 2.4 billion euro for this data. Besides this, Facebook also earns money by selling Facebook Credits. With these credits users can buy stuff in lots of computer games. Facebook gets 30% of every purchase done with these credits.

3. What are the risks? The main issue is that Facebook needs to keep its users. In order to keep making money the number of users have to stay this high, this is the force behind the success. And as fast as Facebook grew, just as fast it can disappear. But the infrastructure of Facebook is so advanced, that it is hard for another site to overtake their position. A bigger and more acute risk is tighter privacy legislation. In the European Union as well as in the United States this legislation can cause Facebook to earn less money on selling personal data, which is crucial for the company.

4. How does an IPO work? The business banks Morgan Stanley, Goldman Sachs and JP Morgan will accompany the IPO. Banks all around the world inventory the demand and interest and order the shares at one of the three business banks. Depending on the prices investors want to pay, the three banks establish an introduction price and decide how many shares the subscribers get. Probably the demand exceeds supply, because of the interest among private investors. As soon as the allocation of the shares has finished, the initial listing in Nasdaq follows.

5. How to subscribe to Facebook shares? Subscribing can only be done at American Banks. Investors that can subscribe, have to point out the amount of shares they want and for which price. Investors who subscribe at a higher price have more chance in getting the shares than investors subscribing at a low price. Subscribing, however, does not guarantee that shares will be allocated to you, especially not when the demand by far exceeds the supply.

6. What information does the prospectus provide? American analysts expect that the fair value of Facebook after IPO will at most be 75 billion. experienced investors first look at the transactions done in recent years outside the market. In 2009 insiders valued Facebook at 7.4 billion and at the end of 2010 it increased to 26 billion. The prospectus also shows the earning model and the profit development which are of interest to the investors. Besides this a must in the prospectus is the overview of circa 1180 consisting shareholders with their interests and voting rights. Also the share options of 258 million and the probational issued shares of 379 million should be mentioned.

7. Will the IPO of Facebook be similar to Google? The IPO of Facebook has more in common with Google’s IPO than with World Online’s IPO. This is because Facebook is already actually making profit. With Google’s IPO, investors had to pay 85 dollars per share in 2004, extremely expensive Americans said. April this year the value of a Google share is about 650 dollars per share.

8. What changes will be triggered for the Facebook account holders? There will especially be changes in leadership. Mark Zuckerberg will have to deal with many more shareholders which can eventually have consequences for users. The quarterly figures will become more important and this can put pressure on the number of advertisements on the website.

[Source: Elsevier]


Image courtesy of worradmu


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