Tuesday, January 31, 2012

Facebook IPO - overvalued & irrelevant

Facebook is set to release its IPO as early as this week and there is much speculation over whether the floating of this tech company will be all it's cracked up to be.


It is likely to be one of the largest tech IPOs to date with reports putting the valuation of the company at around $100 billion. However, it is not clear how much Facebook actually makes through advertising and whether the price tag is overvaluing the tech company.

The Wall Street Journal speculates that the IPO could happen as early as Wednesday this week [1st February] and was looking at picking Morgan Stanley as the lead underwriter, knocking out the other potential candidate Goldman Sachs.

Reports suggest Facebook will sell  $10 billion worth of stock in its offering, valuing the company at $100 billion, and leaving the social network's underwriters around $100 million in fees. At only 1% of the entire sum this would be the second lowest underwriting fee of all time with the exception of General Motors' IPO which generated only 0.75% in fees from its $18 billion IPO in November 2010 [CNN Money].

'Important moment in history'

Aside the smaller percentage generated for the underwriters, there is also a concern the valuation of the company as a whole is over inflated. Not since Netscape or Google's IPO has there been so much interest in a tech company going public. "This is clearly the most important moment in the Valley's history since the Netscape IPO," says Stephen Diamond, associate professor of law at Santa Clara University. "The Netscape IPO put the Valley on the map in a different sort of way. Post-Netscape, it was not just a silicon, hardware world." [MarketWatch]

Google's stock has soared since its IPO in 2004. The search giant offered 19,605,052 shares at a price of $85 per share. Shares in Google are now well above $500 despite a fall in profits in recent months. Netscape has arguably done less well. Once the dominant browser in 1995 the company was eventually swallowed up by AOL in a $4.2 billion deal in 1998.

Tech failures

Excitement seen in other tech IPOs has also failed to materialise the mass profits initially. When a number of Chinese tech companies launched on the NYSE there was a huge interest generated. But over time these companies have failed to make the returns envisaged.

RenRen, China's homegrown version of Facebook, search engine Baidu, news and micro-blogging portal Sina and video sharing website Youku were all promoted as being tech stocks to watch. Baidu has managed to grow from $40 per share to $130 in the last two years, peaking at $157 in July 2011, but other Chinese tech stocks have fared less well.

Since its launch in early 2011 RenRen's shares have tanked, dropping from $18 to a little over $6. Despite a peak in April 2011 of $62 per share Youku's stock has dropped to only $23, markedly below the $37 share price it began with in late 2010.


There are a number of reasons behind these falls but one main factor is the lack of transparency concerning the companies' accounts. When the US questioned accounting practices, in a number of Chinese companies, and proposed to launch a probe to investigate, stocks plummeted [BBC].

Even where accounting practices where not necessarily in question there were still concerns that China's dotcom bubble was set to burst [BBC].

Dangdang, China's answer to Amazon, launched on the NYSE in late 2010 but has plummeted from $32 to only $8.15. And while rival Jingdong [360buy.com] is doing well it is not yet making a profit and has so far held back from launching on Wall Street.

Since March 2011, 30 US-listed Chinese firms have seen their auditors resign and 20 have been de-listed while regulators examine accounting and disclosure issues. Concern over corporate governance has eroded confidence in other Chinese companies listed in New York, even those not accused of any wrongdoing.

But while China arguably has the largest Internet market, growth for many Chinese tech companies is finite. Many are built only around a Chinese language platform and even if this were expanded to include English and other languages, the tight restrictions and censorship within China would force these companies to build separate infrastructure outside the country if they wanted to compete with Western rivals.


Censorship is unlikely to affect Facebook's growth, though it may be forced to make some changes if it wishes to enter China, as has also been speculated since Mark Zuckerberg's 'secret visit' in 2010 [Independent / Forbes / tvnewswatch - Twitpic]. Where Facebook may fail is in terms of transparency. In fact the company has effectively been forced to go public since SEC regulations stipulates that certain financial information be made public because the company has more than 500 investors. The deadline to file this information expires in April.  But going public has its risks. While Facebook  will have access to new cash and possibly enable it to acquire other companies and reward its employees, it will also lose some of its 'mystery and cool'. It may also disappoint since it will also be forced to reveal its profits or losses. The excitement and enthusiasm surrounding the IPO will likely result in the offering being oversubscribed. And many of its some 3,000 employees will likely become millionaires overnight. What remains to be seen is how the company fares over time both in terms of its profitability and its place on the world wide web as competition from rivals such as Google+ squeeze Facebook's dominance. In fact some have already called the IPO an irrelevancy [Forbes / NPR / FT]. 

tvnewswatch, London, UK

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