Facebook will be forced to go public

6th January 2011

 

However, the real life plot is thicker than any movie's. Facebook founder and largest individual shareholder, Mark Zuckerberg, who owns almost quarter of the firm, often pours cold water on the prospects of a float. His attitude might best be summed up as 'list in haste, repent at leisure'.

But some commentators believe it may be out of his and other shareholders' hands.

Those shareholders make quite a list. They include the Facebook staff with 30 per cent. Microsoft itself has a 1.6 per cent share, a legacy of having tried to buy the firm a few years back. LinkedIn founder Reid Hoffman, who may also be on the IPO trail, has some stock as does Hong Kong billionaire Li Ka-Shing and US senator Barbara Boxer. Even U2 lead singer Bono owns 1.5 per cent through his Elevate investment vehicle. His share cost $210m but has achieved a vertigo inducing fourfold return – on paper at least. 

If you have a couple of million dollars spare, you can get a piece of the Facebook action too, provided you agree not to sell the shares until 2013, with Goldman Sachs creating a special investment vehicle for the purpose. Goldman itself now has 0.8 per cent and helped organise Russian firm Digital Sky Technologies' purchase of 10 per cent for $500m, hence the $50bn valuation. But that is also the problem. 

In what might be described as informed speculation, some analysts believe that the US Securities and Exchange Commission in the US could force an IPO. Analysts think Facebook may be falling foul of SEC rules or at least sailing very close to wind. Here is FT Alphaville on the issue. 

The Wall Street Journal inquiry is also scenting an inquiry covering the whole tech sector and the secondary market.  

 

SEC RULES

Under SEC rules, if you have more than 499 share holders you must go public. However, Facebook was given special dispensation in 2008 because, it argued, many shares are owned by its staff. Indeed, retort the analysts, but Goldman has effectively set up a special purpose vehicle and SEC rules say these cannot be used to avoid an IPO. They say Facebook shares are trading like mad on the secondary market with retail investors reported to be clubbing together to invest. Finally, say the analysts, Google faced a similar issue in 2004 which helped prompt its floatation.

 

WHAT DOES IT MEAN FOR INVESTORS? 

There are several views on what all this means but many believe the upshot is that the Fed will force Facebook to list by May 2012, the end of its next fiscal year.

But will it be a good deal for investors? Well, mention Google and you mention one of the biggest investment success stories in history. However sceptics point to MySpace and its difficult progress since News Corp bought it in 2005, since when, it has seemed to shed users. Most say it depends on the price, with $30bn viewed as more realistic than the $50bn value that the Russian deal indicates.

In the Guardian, City columnist Nils Pratley  makes two telling points.  First, Tesco with a theoretically similar valuation expects pre tax profits of £3.7bn. Facebook's revenues, not profits, were just $2bn last year. Even the top social networking site is not the same kind of business as the  world's dominant search engine Google. He adds: "Paying 25 times revenues for Facebook is asking to be disappointed."

Yet the commenters are not so sure and believe Mr Pratley has left a hostage to fortune.

derekorgan says: "This is going to be a very embarrassing article for you in a few years."

goldentomo agrees. "While Facebook's $2bn revenues looks very small, I'm pretty sure Tesco doesn't have over half a billion active users of their website. With that many punters on the books and so much money to play around with, I'm sure that Zuckerberg et al will figure out a business model where they can turn around more than $2bn revenues per year, even if they just replicate Google's AdSense advertising model," he comments.

TallestPurple however is deeply skeptical. He writes: "Tesco actually sells something! I speak as a Facebook user but I have no desire to buy anything from the site or even from anybody advertising on the site. Like most people I know I use pop up blockers to ensure that I see as few adverts as possible."

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