Facebook's initial public offering and market impact

¶ … IPO

Facebook's IPO

Facebook, the world's leading social networking site, has recently filed to raise capital by launching an initial public offering (IPO). During this process the company will sell equity shares in the form of stocks to interested investors. There has been much hype about Facebook's IPO and it has been a long awaited event. Facebook has had an interesting history and the company's CEO has publicly stated his intentions "not to hurry" the IPO on many occasions. One reason that Facebook has not been in a hurry to find additional capital is because the company has been rather well capitalized throughout most of its existence. However, the circumstances have change and Facebook has finally decided to utilize the IPO to raise additional capital and make the company a public traded corporation.

In the world of finance, capital structure is used to describe the manner in which a corporation finances its assets through some mixture of equity, debt, or hybrid securities (Atrill & McLaney, 2011). A firm's capital structure is the breakdown or structure of its long-term liabilities. For example, a firm that sells eighty million dollars in equity and twenty million in debt is said to be eighty percent equity financed and twenty percent debt financed. The firm's ratio of debt to total financing is twenty percent in this example and is known as the firm's leverage or also the firm's debt to equity ratio.

Basically, any corporation has roughly two choices. The corporation can either sell equity, usually through the issuance of stocks or bonds, or it can sign a note with more of a traditional lender, such as a bank, which will have specific terms associated with it. If a corporation choses to raise capital by going public then the terms are tied to its profitability; whereas a bank of some other private lender will require a specific amount regardless of the firm's profitability.

Each manner of financing capital has different strengths and weakness that may vary in different circumstances as well as in different industries. For example, it is easier to finance things like short-term debt with debt financing however long-term debt is usually easy to finance through equity since the terms are more flexible because they are based on profit sharing. If Facebook chose to finance capital with debt, as it has previously done, it would be required to repay this debt in a predefined manner. However, by issuing stocks the company does not have to worry about a predetermined payment schedule but instead has to share the company's profits with investors.

From the investors perspective, the potential investment's value is widely disputed (Russollio, 2012). Given the popularity of the social networking site many speculators are comparing the company to other technology firms such as Google and Apple. If the Facebook network is able to achieve results similar to these technology giants then it will offer remarkable returns to its investors. However, if Facebook takes the course of other IPO investments, such as Zynga or LinkedIn, then investors will be far from profitable in this investment.