Facebook is a place where people spend most of their time as compared to any other internet property.
Facebook and online social networking site, founded on February 4, 2004, by Mark Zuckerberg with his college roommates and fellow Harvard University students held its initial public offering on 18 May 2012. With 845 million active users and 2.7 billion daily likes and comments in just 8 years, Facebook IPO undoubtedly became one of the biggest IPO in technology and in internet history with the value of the issue of $16006.9 Million
In early May the company was aiming for the stock price ranging from $ 28 to $35 per share leading to valuation which ranged from $77 billion to $96 billion respectively.
However, with strong demand in the market especially from retail investors facebook choose to increase the number of shares issued to the public by 25% as well as increase the target price per share. So, Facebook issued 421 million shares at a price of $38. This price valued the company at $104 billion.
Since some investors showed a keen interest in Facebook as they thought they had missed out on the gains google saw in wake of its IPO, Facebook IPO brought inevitable comparisons with other technology company offerings.
Why Did Facebook go public?
For the past 8 years, Zuckerberg tried a lot to keep Facebook as a private company but Facebook was becoming too big leaving little choice with Zuckerberg.
According to the rule set by the Securities and exchange commission (SEC), from 1964 any private company with more than “500 shareholders of record” must adhere to the same financial disclosure requirements that public companies do. That means filing detailed quarterly and yearly financial reports and dealing with all the scrutiny that comes with a powerful company opening its books.
Facebook which was growing big was crossing the shareholder’s requirements as per SEC i.e 500 and this became the key reason for the Facebook to go public.
Facebook IPO Stock price graph
Source: – Yahoo Finance
Facebook had issued its shares at $ 38 per share. But do you really think the stock traded at $38 per share? Facebook IPO was launched at the stock price $ 38 but it did not trade at $38 till August 2013.
Looking at the graph you can see that from May 2012 till August 2013 Facebook IPO stock price was trading below $38.
There are 4 major problems because of which Facebook IPO was trading below $38. They are:-
The lead investment bank of Facebook Morgan Stanley valued the company at $104 billion. According to the experts, Facebook was Overvalued due to the actual ability of Facebook to generate money.
Facebook generates money in 2 ways:-
Facebook generates around 80% of the yearly revenue by giving ads on its site. The remaining 20% of the revenue is generated from other sources.
The companies who own the game which we play on Facebook pay facebook for their games to be shown on their site, this comes in another source of income for Facebook.
As numerous experts have noted, the click-through rate on Facebook ads averages a dismal 0.051% or roughly one click per 2,000 viewers. In other words, as dozens of other websites have already discovered, customers respond poorly to online advertising and prefer to shop via sites they find on their own. Due to this many advertising companies may withdraw their money from the Facebook site e.g. General Motors announced to withdraw $ 10 million advertising buy from the site just before the IPO.
The fact is that Facebook has not yet been able to find an ad model which generates revenue proportionate to its revenue.
Facebook had set its price at $28 – $35 per share. But just before the IPO is launched the company raised the price to $38 per share. After the negative disclosures and insider trading, it became very clear that Facebook shares were not perfectly priced.
Bad execution of Facebook IPO:-
This was also a reason for the share price decline of the Facebook. In spite of the shares being overvalued Facebook had increased the number of shares by 25%.
When the quick profit failed to materialize a couple of the days after the IPO, The investors who received more shares than they wanted effectively became forced sellers.
The timing of the key activities makes you wonder what signal the company was sending out. For example, the analyst handling IPO had cut the forecasts of the firm after the IPO filing update. At the same time, Facebook leaders and their Investment Banking colleagues were pushing for sale at the top end of their price range.
Bad Timing and lawsuits faced by Facebook:-
Facebook had faced a number of lawsuits following its IPO. Just prior to IPO, Morgan Stanley, as well as many other analysts, lowered Facebook’s earnings expectations which were not disclosed in Facebook’s S – 1 filing.
Many users had started using the Facebook app on the mobile. Facebook is finding it difficult to shift its ad sales to mobile platforms, a place the company admitted it does not currently generate any meaningful revenue. Facebook had repeatedly warned in the IPO filing about the challenges they were facing in mobile advertising. Due to these challenges of mobile advertising just before the IPO, Facebook had realized that its 2Q 2012 revenue would be lower than previously estimated in its IPO statements. This was communicated verbally to the large investors, but small investors were kept in the dark. Due to this large investors made huge profits by betting against the company or many others avoided major losses by backing out of the IPO just in time, while small investors were left with overpriced shares.
Since 57% of the shares sold in the Facebook IPO came from Facebook insiders, investors had lacked confidence in the stock.
On the day of the trading, the stock opening was delayed due to technical glitches, as NASDAQ’s electronic trading platform was unable to handle the high volume of trades.
Due to this, some investors failed to sell their stock during the first day of trading while the stock price was falling—forcing them to incur bigger losses when their trades finally went through.
Due to all these reasons, Facebook IPO was not trading at the price on which it had launched i.e. $38 per share. Only from 2nd August 2013 facebook had started trading at a price of $38.05. From 2nd August 2013 till 22nd August 2013 Facebook was trading in the range from $38.05 – $38.55. On 22nd August 2013, the Facebook IPO stock price had started increasing and today’s i.e. 15th April 2014 Facebook IPO stock price is $58.89 per share.
Facebook IPO, Infographic
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