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The Facebook IPO Journey

Published on Sat, May 19 16:21, Updated at Mon, May 21 at 08:15
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Our top story today is about a 28-year-old man and his 8-year-old company's journey to a USD 100 billon valuation on Wall Street. I am talking Facebook.
8 years ago a 20 year old Harvard drop out appeared on CNBC to explain his new venture
CNBC's Becky Quick: "What is Facebook?"

Mark Zuckerberg: "It is an online directory that connects people through universities and colleges to do their social networks there. You sign on, you will make a profile about yourself by answering some questions such as your concentration and major in school, contact information about phone numbers, instant messaging screen names, anything you want to tell, interests, what books you like, movies and most importantly who your friends are."

2 years ago, Mark Zuckerberg was 26 and Facebook half a billion strong.

Mark Zuckerberg: "It is an exciting milestone for the Facebook community and for all of you who helped spread Facebook around the world. Half a billion is a nice number."

Here's another nice number – it’s 2012 and Facebook has taken Wall Street by a $100 billion storm.

Mark Zuckerberg: "Facebook’s mission is to make the world open and connected."
The iconic story of Facebook is the stuff books are written about or movies are made on. With 526 million daily users, 901 million monthly users, Facebook boasts of 125 billion friend connections and 3.2 billion likes and comments generated every day. It’s a worldwide phenomena with 80% of its users outside USA and Canada.

A few years ago as Facebook made its way into your daily routine, demand for its shares soared on Sharespost and Secondmarket - secondary markets for private companies. Ironically it is that popularity that may have pushed Facebook to friend Wall Street earlier than it intended to.
Roger Cheng, Executive Editor, CNET News
"I don’t think Facebook really wanted to go public, Zuckerberg preferred to keep it private, preferred to have full control of his company, but given that the company had exceeded its shareholder limit of 500, it had to go public."
Adam Fleisher, Partner, Cleary Gottlieb
"I think that is right. Until very recent changes in US securities laws, if a company had more than 500 shareholders then it was necessary for the company to become a public reporting company with the SECOND, which means filing 10ks and 10Qs doesn’t mean that the company has to go and do an IPO or seek a listing but it does mean that you have all the burdens of being a public company without potentially any of the benefits.And I think we have all seen the indications that there was a very significant number of shareholders prior to the time of the IPO, likely in excess of the 500 shareholder count threshold, which made it an opportune time for Facebook to consider a minimum listing & more likely an IPO. So I think there were definitely some legal considerations that played into it. And as you alluded to, it is quite interesting that in this case at least, with Sharepost and Secondmarkets, we really saw almost an unprecedented pre-IPO secondary market for employees and private investors. So I think there were some legal considerations that played into it."
In February this year Facebook made its IPO filing. Last week the offer hit the road. On May 7th, hundreds of investors crowded outside New York’s Sheraton Hotel as a hoodie-clad Zuckerberg made his way in – he was late to his first investor meet! But neither his informal apparel, nor his tardiness, nor his cameo like appearances as the roadshows progressed, nor this unconventional video sales pitch could discourage investors. In the week before its listing Facebook upped its IPO price band and existing shareholders put more shares on offer. At over $18 billion the Facebook IPO was on its way to become America’s largest ever.
Adam Fleisher, Partner, Cleary Gottlieb
"In US, unlike India there is no pre-demarcated set of shares reserved for each category of investors, I think it is the job of the investment banks, when they are building the books, to have that discussion with the company and to come up with a shareholder composition that achieves the goals that I was just alluding to, both having investors that have a long term interest and vision for the company and want to hold as well as satisfying some of the retail appetite.
Menaka Doshi, CNBC TV18
"I understand that post the IPO, Mark Zuckerberg, the founder’s voting share will continue to be above 55%, I am told at about 55.8% and this categorizes Facebook as a 'controlled company'. We are very familiar with 'controlled companies' in India because the bulk of our companies are 'controlled companies' or promoter led companies as we refer to them here in this environment. But the rules are different in the US for 'controlled companies' versus non-controlled companies. Give us a sense of how Facebook will have to govern itself in the years to come considering that it is now a public company?"
Adam Fleisher, Partner, Cleary Gottlieb
"Under stock exchange rules in the US, a company where you have a controlled group that owns more than 50% of the outstanding rights of the company, you have certain exemptions that apply from corporate governance requirements that otherwise apply to other companies. So in this case there is no requirement to have an independent majority board, independent compensation committee, or an independent director nomination function. That is not just to say that they don’t have to do that but they are not required to do so. In the case of Facebook, they have chosen to take advantage of not having independent director nominating function which is just to say that the board itself will be responsible for nominating directors. The company will have an independent audit company because that is required by law and my understanding is that they have chosen to have an independent compensation committee and an independent governance committee. And all that said, as you alluded to, the real story here is the level of control that Zuckerberg will have and he will have approximately 56% of votes after the IPO proceeds. Not only does that arise by virtue of the dual class ruling structure with the Class B shares carrying 10 votes each to one vote each for the Class A shares but he's also got proxies from a number of the other shareholders which gives him the right to control the votes over those shares. So together with the other Class B shareholders I think he will have something to the order of 96% of votes of the company after it goes public. That said there is also a significant array of anti-takeover measures... for example there are special voting rights the class B shares have, a super majority voting provisions and there are provisions that will kick into effect in the future that would stagger the board among other things. So even aside from the control of company under the stock exchange rules, really the whole capital structure and voting structure has been arranged in a way to ensure that atleast in the foreseeable future the control is with Zuckerberg and the other B class shareholders. Whether that is something that the shareholders will accept we'll see."
Before that, Facebook has a valuation to live up to. In the last 3 years Facebook’s revenue grew 3 fold to $3.7 billion last year and net profit increased 5 times over. But is a billion dollars of income worth a $100 billion valuation? Google’s 2011 revenue and earnings were 10 times that of Facebook and yet at the top end of its IPO price band Facebook was valued at more than 4 times the price earnings multiple that Google enjoys. But the revenue sources are the same – 96% of Google’s revenue comes from advertising – the old internet business model of display ads. For Facebook its 85%. The rest is commission earned from games & app sales. A 12% drop in Facebook’s earnings in the first quarter this year may point to slowing growth and higher costs. But Google’s profitability seems to be holding up.
Roger Cheng, Executive Editor, CNet
"Its tough to compare it with Google, both are very large internet companies but that is not where the similarities end. Google has perfected the targeted ad model. You type what you want and they will send you a relevant ad and advertisers love it and pay big bucks for it. Facebook on the other hand is a place where people like to hang out, it's not necessarily a place where you go to look for things. It's just a place to exchange messages, connect with friends and they are not looking necessarily for display ads and that’s a big concern for Facebook, it is how you will make money off those ads. Because there’s a study that came out today, one-third of the people would never click on the display ad of Facebook and lot of people don’t trust Facebook with their private information. So again that is the main concern. The other real question mark for both companies is mobile. Facebook has been trying to push into mobile, they spent $1 billion on Instagram, but it is still kind a of question mark as to what their actual mobile strategy is, how they will monetise it. With Google, they made big bets on Android as their mobile platform and they are clearly increasing their mobile presence but again Google also hasn’t done as good a job monetizing the mobile space as its presence would allow it to."

Menaka Doshi, CNBC TV18
"I am told in their (Facebook) interactions they have suggested that they might charge for certain kinds of posts, they intend to launch their own app store, they intend to monetise, to a further extent, the games and apps available on Facebook. What kind of potential do these new revenue streams have, if at all, to help justify the kind of valuation we are seeing in this IPO?"
Roger Cheng, Executive Editor, CNet
"That is exactly what Facebook has to deal with as a public company. They have to show that they can make money. The platform, the push for more apps and games to ride on their platform, the ability to monetise their posts by charging people to prioritise certain posts... that’s the sort of things you are going to start seeing Facebook do more aggressively. I think as a private company they didn’t need to show they were making money, though they were generating a lot of revenue. But as a public company, with shareholders to answer to, you will see a lot more initiatives."
Menaka Doshi, CNBC TV18
"That is a bit like the tail wagging the dog. Instinctively what do you think this might do to the millions of followers that Facebook has? Do you think that it might make the Facebook offering a little less appetising to them?"
Roger Cheng, Executive Editor, CNet
"Absolutely. Already a lot of people are turned off by the increase in display ads. Facebook used to be a clean site, you would go to there, you push your links, you share links, you like each other, like each others posts. It was simple but it has gotten bogged down with a lot of display ads. Therefore there is more pressure to make money and I think users see that. That said people are stuck with Facebook, all their friends are on it. It is the biggest social network out there. So it is kind of tough, even if people are turned off by the ads, it is tough to see people leaving the Facebook service."
On May 18th, 4 days after Marc Zuckerberg turned 28, his company debuted on the Nasdaq. Priced at $38 a share, the stock listed at $42. At that price Zuckerberg’s networth rose to $21 billion. But he’s not the only one – a study by WealthInsight says the Facebook IPO will create 970 millionaires including 165 ultrahigh networth individuals (UHNWIs), 295 mid-tier millionaires ($5-30m), and a further 500 high networth individuals (HNWIs). This from a guy who says Facebook was not originally created to be a company. It was built to accomplish a social mission – to make the world more open and connected. The question is will investors stay connected to Facebook?

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