Facebook IPO: History, Pricing Factors, and Future Prospects
This paper examines Facebook's rise from a Harvard dormitory startup to the world's largest social network, and analyzes the company's planned Initial Public Offering (IPO) targeting approximately $10 billion. Beginning with a brief history of Facebook's founding by Mark Zuckerberg in 2004, the paper traces its expansion from a university-only platform to a global social network. It then evaluates the key factors likely to determine IPO pricing — including investor sentiment, company size, and firm age — before considering variables that could affect share value once trading begins. The paper concludes by assessing Facebook's future growth prospects, including potential uses of IPO proceeds for organic expansion and acquisitions.
- Introduction: Overview of Facebook's growth and planned IPO
- Facebook: A Brief History: Founding, expansion, and early milestones
- The Planned IPO: IPO targets, revenue figures, and market context
- Factors Likely to Determine Facebook's Share Price: Investor sentiment, size, and firm age as pricing drivers
- Facebook's Future Prospects: Post-IPO growth strategies and revenue opportunities
- Conclusion: Summary of IPO outlook and company future
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What makes this paper effective
- The paper follows a clear logical progression — from company history to IPO mechanics to pricing factors to future outlook — giving readers a complete picture of the investment event.
- It grounds financial analysis in concrete figures (e.g., $3.71 billion in 2011 revenue, 85% of revenues from advertising, 88% year-over-year growth) that lend credibility to the argument.
- The annotated bibliography demonstrates source evaluation skills, briefly summarizing and assessing the relevance of each source used.
Key academic technique demonstrated
The paper effectively uses multiple causal factors to analyze a single financial event. Rather than offering a single explanation for how the IPO price will be set, it systematically identifies three distinct determinants — investor sentiment, company size, and firm age — and explains the logic of each. This multi-factor analytical approach is a strong model for business and finance writing at the undergraduate level.
Structure breakdown
The paper opens with a brief contextual introduction, then provides historical background on Facebook's founding and growth. The central sections analyze the planned IPO and the factors affecting share pricing, both at launch and after trading begins. The final section projects future growth scenarios before a brief synthesizing conclusion. An annotated bibliography closes the paper, evaluating the two primary sources used throughout.
Introduction
Facebook, a leading social networking service with more than 800 million users, has grown far beyond the expectations of most observers since the time it was founded. Launched in 2004 by Mark Zuckerberg and several college colleagues, Facebook gradually became a dominant force in the social networking field. The company was seeking to raise approximately $10 billion from an upcoming Initial Public Offering (IPO). Apart from making a number of its existing stockholders instant millionaires, Facebook's IPO was expected to impact positively on the firm's bottom line, market capitalization, and performance going forward.
Facebook: A Brief History
According to Philips (2007), Mark Zuckerberg founded Facebook while studying psychology at Harvard University. It is important to note that even before teaming with others to establish Facebook, Zuckerberg had already created several other social networking platforms, including Facemash and Coursematch. While Coursematch concerned itself with matching individuals taking a similar course, Facemash was a platform that enabled individuals to rate the physical attractiveness of others.
Facebook was launched in February 2004, though its original name at the time was "The Facebook" (Philips, 2007). Initially, membership was largely restricted to Harvard College students, and within a short while more than 50% of those undertaking graduate studies had signed up. The startup soon extended its membership across several universities in the United States. It was not until mid-2004 that the startup became incorporated, with Sean Parker being named its President. According to Philips (2007), the company became Facebook.com in August 2005 after the domain address was purchased for $200,000. About a month later, high school students in the U.S. were permitted to join — a step Zuckerberg viewed as the firm's next logical progression. Workers from a number of companies were subsequently allowed to sign up as well, and it was around this time that Facebook's unprecedented global spread began in earnest.
As Philips (2007) notes, any individual possessing a registered email address could join the network as of 2006. The growth of Facebook in the years that followed attracted investors interested in purchasing a stake in the social networking site; however, these offers were largely rejected. According to Raice (2012), Zuckerberg — who had in the past demonstrated some reluctance regarding an Initial Public Offering — owned around 28% of the company and held 57% of its voting share power.
The Planned IPO
In Raice's (2012) opinion, Facebook's IPO could turn out to be "one of the biggest U.S. stock-market debuts of all time." The firm targeted approximately $10 billion from the offering. However, this figure was largely an estimate; in its filing with the SEC, the company indicated that its target figure was $5 billion — a number Raice (2012) characterized as a "placeholder" that was more likely than not to increase. Facebook reported total revenues of $3.71 billion for the year 2011, which translated to a profit of $1 billion (Raice, 2012). The company's revenues were primarily drawn from social gaming, advertising, and other relevant fees. Advertising alone contributed approximately 85% of total revenues (Raice, 2012).
In a broader sense, the relevance of Facebook as a global social platform cannot be overstated, and this is precisely what made the company wildly popular. As an indicator of its reach, Facebook was utilized on both the social networking and political fronts — most notably in the role it played in the toppling of several Middle Eastern political regimes. All of these factors served as indicators that the company was mature enough to successfully undertake an IPO.
Conclusion
With all indicators suggesting that the Facebook IPO would be a success, proceeds from the offering stood to give the company a new competitive edge by enabling it to enhance its existing capabilities while pursuing new opportunities. With the number of users signing up on Facebook continuing to increase daily, the company's primary revenue source — advertising — was likely to continue making significant contributions to Facebook's profitability. On the basis of this analysis, the company's future prospects appeared genuinely promising.
Annotated Bibliography
Philips, S. (2007, July 25). A brief history of Facebook. Retrieved February 27, 2012, from The Guardian website: http://www.guardian.co.uk/technology/2007/jul/25/media.newmedia
This article concerns itself primarily with how Facebook developed over time since its inception. It goes into significant detail in charting Facebook's growth from a social networking platform targeting a small number of university students to a global social network. The author also touches on some of the most recent happenings surrounding Facebook at the time of writing, from rumors of public figures having joined the platform to the banning of events organized through Facebook.
Raice, S. (2012, February 2). Facebook sets historic IPO. Retrieved February 26, 2012, from The Wall Street Journal website: http://online.wsj.com/article/SB10001424052970204879004577110780078310366.html
This article concerns itself primarily with the anticipated IPO of Facebook. Raice carefully considers the arguments surrounding the offering, including the reasons why Zuckerberg had been reluctant to take the company public. The article also highlights Facebook's recent financial performance, with particular emphasis on both revenue and profitability. The author draws on the opinions of several market analysts in seeking to assess Facebook's prospects going forward.
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