Facebook IPO: History, Pricing Factors, and Future Prospects

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.

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: A Brief History

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.

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.

There are many factors likely to determine Facebook's IPO pricing, and several additional factors would conspire to affect the share price once the stock began trading.

The Planned IPO

One key determinant of Facebook's IPO pricing is investor sentiment. If investors are overly optimistic, the share price at the IPO could be set higher; the reverse is equally true. Exaggerated investor confidence could therefore lead to the company being overvalued by the market. Furthermore, a surge in profitability can work to a company's advantage when an IPO listing coincides with an increase in earnings — as was the case with Facebook — since investors may interpret this as a sign of enhanced future performance, driving the share price to a premium.

A second factor is the size of the company. When there is significant uncertainty regarding the value of a firm, investors are more likely to demand that the IPO be priced at a discount. The lower IPO price can in this case be regarded as an incentive that compensates investors for taking on greater risk.

A third factor is the firm's age. Because of their longer operating histories, older companies typically face less uncertainty than younger ones. Younger firms may be subject to more intensive public scrutiny due to their shorter track records, and investment bankers may deem it appropriate to discount the offer price in order to compensate for the missing history. In Facebook's case, however, there was relatively little valuation uncertainty, as the company's track record since its founding was fairly well established.

Conclusion

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.