Stock offering sets Facebook value at $104 billion

Posted: May 19, 2012

It was the stock market event of the year, sure to make millions of dollars for venture capitalists, investment banks and other financiers, and billions for Facebook's founders and earliest backers.

It was a cultural benchmark - the day when the phenomenon of "social media," a term many consider synonymous with the company Mark Zuckerberg created, finally cashed in on years of massive and growing buzz.

But Thursday's initial public offering for Facebook shares - the most ballyhooed IPO since Google, and successful enough to value Facebook at $104 billion - arrived with some large question marks posted on its wall.

Social scientists and industry analysts agree on this much: Facebook has changed how vast numbers of people in the United States and elsewhere in the developed world interact. Less clear is whether it's a hotly burning sun, destined to stay with us and enrich even latecoming investors, or a shooting star that will someday be outshone.

As anyone who saw the Oscar-winning movie The Social Network probably recalls, "The Facebook" was born on Harvard's campus as a way for college students to connect. But it soon outgrew those ivy-covered walls.

Worldwide, Facebook counted more than 900 million "monthly active users" at the end of March, presumably meaning that they had created a profile since the company was founded in 2004 and had done something recently related to the site.

Outside data confirm that hundreds of millions of those Facebook users remain engaged. According to Nielsen, nearly 153 million Americans logged on in March - more than two of every three active U.S. Internet users. That same month, 38 million logged on in Brazil and 25 million in Germany.

Active Facebook users don't just browse the site. They update their "status," "poke" friends, and post pictures on their own pages and comments on their friends "walls." And many people happily punch the Facebook "like" button wherever they find it, a social-media invention that widely expands the online community's reach.

Unlike some of the tech world's more wishful creations, Facebook is also highly profitable: It reported net income of $1 billion last year on $3.7 billion in revenue, according to the IPO prospectus it filed in February.

Those kinds of numbers, especially in a period of lingering economic anxiety, have fueled a large appetite for Facebook's IPO. After the market's close Thursday, the company announced an opening price of $38 per share, well above the $30 to $35 that many analysts projected.

That was enough to raise more than $16 billion and to put a market value on the company of $104 billion, confirming its high-tech stardom.

"Facebook has led the social-media revolution," said Vincent Schiavone, cofounder of ListenLogic, a market research company based in Fort Washington that sifts social-media data for business intelligence.

"It is clearly the most valuable and largest community in the world," Schiavone said. "It's like a new town square - a new water cooler."

Even those concerned about the privacy risks posed by Facebook and other social media share that awe at its social impact.

"Facebook has redefined what it means to connect with other people," said Joseph Turow, professor at the University of Pennsylvania's Annenberg School for Communication. "For many, many people, Facebook is the way they keep up with their friends, the way they interact with their relatives, even the way they keep track of their kids."

Both Turow and Schiavone marvel at how swiftly Facebook eclipsed MySpace - Nielsen says it blew by that social-media pioneer in 2009 - and has fended off competition from high-tech powerhouses such as Google and Microsoft.

But MySpace's quick rise and fall, along with the business risks Facebook warns about in its official corporate prospectus, are a reminder that there are no guarantees, said Andrew Stoltmann, a Chicago securities lawyer who warned Thursday about the particular risks that small investors face in the Facebook public offering and other tempting IPOs.

Ironically, small investors can suffer harm after an initial public offering because of market rules ostensibly designed to protect them from the risks that a relatively new company could soar, then crash.

Stoltmann said that because of those dangers, IPOs are generally open only to institutions and wealthier investors with high tolerance for risk. But that does not prevent small investors from buying in immediately after the IPO through a "market order" - an instruction to a broker to buy shares at whatever the available price.

Stoltmann said one red flag about the Facebook IPO is that more than half the 421 million shares offered Thursday were not newly issued by the company. Instead, 241 million of them were sold by existing shareholders.

"The concern is, what do the insiders know that the rest of us don't know?" he said.

Stoltmann said people may be at risk because of generally sensible investment theories such as Peter Lynch's famous dictum "Invest in what you know."

"With 900 million users, a lot of people know Facebook," he said.

After an IPO price of $38, he said, Friday's first "market order" trades could go through at prices of $50, $60 or more.

For a cautionary tale about where they could go from there, he points to the recent public offerings by Groupon and Pandora, pioneers in other Internet niches. He said Groupon shares had fallen about 50 percent from their post-IPO peak, and Pandora's have dropped about 40 percent.

Of course, some companies suffer ups and downs and still come through for patient investors, Schiavone said, recalling Apple's long journey to its $500-plus stock price.

"I bought Apple at $85, so I'm a happy guy," he said. "It's all about how well they execute, but they have the opportunity."

Turow said Facebook's challenge is devising a strategy that capitalizes on its vast database about users' likes and dislikes without stirring more worries about privacy.

"Threading that needle is going to be the real challenge for Facebook going forward," he said.


Contact Jeff Gelles at 215-854-2776 or jgelles@phillynews.com.

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