The Facebook IPO hype: a rude social awakening Finance
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TheFacebookIPOhypearudesocialawakening.pdf
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x This case was written by Wouter De Maeseneire and Anantha Krishna Divakaruni at Vlerick Business School. It is intended to be used as a basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. The case was compiled from field research.
x We gratefully acknowledge financial support from CIM/ICM (Intercollegiate Center for Management Science). x Copyright © 2012 Vlerick Business School, Belgium. No part of this publication may be copied, stored, transmitted, reproduced or distributed in any form or medium whatsoever without the permission of the copyright owner.
The Facebook IPO hype: a rude social awakening
Wouter De Maeseneire
Anantha Krishna Divakaruni
September, 2012
Abstract
Facebook, the world’s largest social network, became a listed company in May 2012. The meteoric rise of Facebook from a Harvard student dorm into a billion‐users platform has fascinated everyone around the globe. Markets had been engulfed with excitement for over a year ever since rumours began to circulate of the company’s planned Initial Public Offering (IPO). In essence, Facebook’s conversion from a much sought after private entity1 into a public firm has been shaped by numerous factors. Lack of credit on favourable terms combined with Facebook’s compensation policy as well as the desire of a couple of influential shareholders to exit their investment prompted the firm to consider an entry into the stock markets. Despite hiring highly reputed and experienced underwriters to facilitate this transition, a series of missteps by several stakeholders encouraged the firm to introduce its shares at an indefensible price. Facebook chose an issue price based on market fads and an alarming level of investor and insider overconfidence; it ignored the estimates suggested by its own valuation models. Further, the company’s frequent and discouraging amendments to its filings with the Securities & Exchange Commission (SEC) eroded the much desired shareholder confidence. This case study describes the benefits and drawbacks of going public, what the IPO process typically entails and the role that underwriting investment banks take up. We highlight various elements that led to the failure of what has been one of the most hyped‐up IPOs ever. Besides discussing the role of various agents in this fiasco, the case reflects on how simple rationale got overridden by the most seasoned titans in the IPO market. In addition, this case delves upon the valuation methods and assumptions that were used by the underwriters to justify an appropriate offer price for the Facebook stock.
1 Especially among venture capital investors.
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Introduction Friday, May 18, 2012, was a crucial day for Facebook. The day marked the official transformation of the leading social networking service into a public company. Financial markets and investors were charmed over prospects of buying shares of a firm admired by the entire planet. As a result of Facebook’s $16 billion Initial Public Offering (IPO), its Chairman and CEO, Mark Zuckerberg, and over 1,000 early‐investors and employees at the firm would become millionaires or even billionaires overnight. Zuckerberg himself stood to become the 29th richest person on the planet with an estimated net worth of $19.1 billion2. The IPO received widespread coverage in the media ever since rumors of the firm going public began surfacing. Experts estimated the value of the firm in excess of $100 billion, skeptics were essentially ignored and everyone wanted a share of the pie! However, the stock debut proved to be a nightmare for everyone involved. By June 6, the price of Facebook shares3 had slumped to $25.52, a staggering decline of 32.8% below its IPO price at $38. An unproven business model based on ad‐revenues, improper valuation estimates and technical glitches during the initial period of trading were instrumental in weakening appeal for the Facebook stock. Since then, the company has faced over 40 lawsuits and is being investigated for malpractice by the Securities and Exchanges Commission (SEC). Thus, Zuckerberg faces an uphill task of reinvigorating his company’s fortunes and restoring investor confidence.
Rise of Facebook: Pre‐IPO The origins of Facebook can be traced to a briefly existent website called Facemash, which was created by Zuckerberg during his second year at Harvard University. Facemash allowed users to compare two random pictures of female students and choose the ‘hotter’ one amongst the two. Zuckerberg had hacked into Harvard’s servers for obtaining students’ images, which caused much outrage within the female student community4. Although Facemash was closed down by Harvard authorities, Zuckerberg had grasped the power of social networking. He therefore began extensive work on a superior social networking platform together with roommates Eduardo Saverin, Chris Hughes and Dustin Moskovitz. Thefacebook.com was launched on February 4, 2004 and was initially restricted to Harvard students5. During the same year, Sean Parker6 invested in the start‐up and also purchased the domain Facebook.com for $200,000. In a short span, the website expanded to all universities across the United States.
2 http://articles.latimes.com/2012/may/17/business/la‐fi‐tn‐how‐much‐is‐mark‐zuckerberg‐worth‐20120517 3 Stock quotes on NASDAQ by the ticker symbol: FB. 4 http://www.businessinsider.com/how‐facebook‐was‐founded‐2010‐3?op=1 5 http://www.guardian.co.uk/technology/2007/jul/25/media.newmedia 6 Founder of Napster.
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By 2006, Facebook was accessible for free to anyone with a valid email address. Zuckerberg was vehemently opposed to selling Facebook and has adopted several strategies to maintain control and independence. His unopposed management style has encouraged quick decisions and led to constant improvement of the platform, dwarfing the likes of famous social platforms such as MySpace and Orkut. In mid‐2012, Facebook had over 901 million registered users (Exhibit 1). Zuckerberg has rejected several takeover attempts, including offers from Yahoo and Google that valued the company at $2 billion. Even Microsoft had to contend with a meager stake of 1.6% after having invested $240 million in 2006, elevating Facebook’s value to $15 billion. Over the years, numerous investors have acquired a share in Facebook at gradually rising valuation levels (Exhibit 2). Much like its competitors7, the site generates revenue from advertising although profits have been realized only since 20098. The latest investment round of $500 million by Goldman Sachs and Digital Sky Technologies in 2011 lifted the worth of Facebook to over $50 billion, provoking massive speculation that the company was preparing for a public offering9. Exhibit 3 provides an overview of key shareholdings and compares Facebook’s value to some of its peers.
Revenue Model Facebook adopted a business model on the lines of tech pioneers like Yahoo and Google. A typical startup relies on a single product and seeks to generate revenues from such sole innovations. Thanks to its Chief Operating Officer (COO), Sheryl Sandberg, Facebook developed an ad‐driven business model10, which allows users to develop personalised advertising campaigns, which are then displayed along the sidebar on appropriate pages. These include users’ home pages, profiles, groups and various third‐party applications that are hosted on Facebook. Ads are displayed to users through granular targeting features derived from individual preferences, topics and variations of words or phrases11. This advertising platform has gained sophistication over the years with capabilities to target audiences based on restrictions like specific cities or regions, age, gender or type of social network12. Corporate customers even have the benefit of using the Facebook Ads API13 for developing customised ad campaigns for dissemination among relevant users.
Financial Performance No information is available in the public domain regarding Facebook’s financials prior to 2007. Between 2007 and 2011, turnover increased 24‐fold from $153 million to $3.7 billion. Revenues from advertising on the primary website constitute over 85% of revenues in 2011. Yet, average annual revenue growth at 88% has been substantially lower than other social networks like Zynga and Groupon at 134% and 426% respectively14. Operating margins have been quite volatile as the company has sought to invest more capital into research and development besides scaling up its workforce to meet growing demand.
7 Most notably, Google and Yahoo. 8 http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm#toc287954_8 9 http://tech.fortune.cnn.com/2011/01/11/timeline‐where‐facebook‐got‐its‐funding/ 10 http://cdixon.org/2012/05/15/facebooks‐business‐model/ 11 http://www.insidefacebook.com/2011/08/23/topic‐ad‐targeting/ 12 Like family, school, work etc. 13 Application Programming Interface – a framework for developing code for additional functionalities. 14 http://beta.fool.com/apinkasovitch/2012/02/02/analysing‐facebooks‐financial‐statements/1573/
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Still, operating performance in 2012 has been anything but supportive of a successful IPO. Just a week before the stock floatation on NASDAQ, Facebook issued an earnings warning stating that the number of mobile users had grown much faster than growth in sales from its mobile platform. The company cited the lack of formidable mobile advertising capabilities for this discrepancy15.
“We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users increasing more rapidly than the increase in the number of ads delivered. Our financial performance and ability to grow revenue would be negatively affected.”
Analysts covering the firm interpreted this statement as a warning that Facebook expected to miss revenue and profit targets for the 2nd quarter, and it was a key point of concern for several institutional investors during the IPO roadshow. Despite making inroads into mobile devices through acquisitions like Instagram, Facebook is yet to devise a credible way of monetizing such products. Over 7% of revenues in 2011 were generated indirectly from virtual goods payments on Zynga16. This relatively small but growing revenue source shows much promise for Facebook’s future prospects. Currently, Netflix and the Washington Post Company are Facebook’s largest customers17 and generated $3.8 million and $4.2 million respectively as revenues in 2011. Facebook has paid back all outstanding debt and held $3.9 billion in cash and marketable securities on its balance sheet by the end of 2011. Working capital is also healthy at $3.7 billion due to its comfortable cash base and low net payables. See Exhibits 4 ‐ 6 for the company’s financial statements.
Concerns Natalie Pace of the Huffington Post says that on average, users spend 56% more time on Facebook than Google18. In fact, the former attracts over a 100 billion, or twice the number, of page views in comparison to Google. Despite its information superiority19, Facebook generated a mere tenth of Google’s revenues in 2011. Facebook has also established another important revenue stream by nurturing third party game services like Zynga and Bigpoint. For this, the firm receives a commission fee20, which contributed over 17% of total revenues21, or nearly a third of Facebook’s pre‐tax income, in 2011. This dependence may change due to the evolving competitive landscape. Game providers ‐ like Zynga in particular22 ‐ have developed capabilities for hosting on rival platforms like Google+, Apple iOS and Tencent. Zynga’s revenue sharing agreement with Facebook is valid only up to 201523. 15 http://www.telegraph.co.uk/finance/newsbysector/mediatechnologyandtelecoms/digital‐ media/9258915/Facebook‐issues‐profits‐warning‐as‐users‐switch‐to‐mobile.html
16 http://www.insidefacebook.com/category/virtualgoods/ 17 For hosting advertisements on the Facebook platform. 18 http://www.huffingtonpost.com/natalie‐pace/facebook‐ipo_b_1251627.html 19 Access to users’ private details, photographs, messages and preferences. 20 30% of subscription fees. 21 http://www.forbes.com/sites/techonomy/2012/05/23/gaming‐a‐boon‐or‐bane‐for‐facebook/ 22 Accounted for 12% of Facebook’s revenues in 2011. 23 http://www.huffingtonpost.com/natalie‐pace/facebook‐ipo_b_1251627.html
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In its S‐1 Filings24, Facebook acknowledged that over 545 million users had accessed the portal using a mobile device. But, the company has been slow to capitalise on this vital medium. While the company earned $3.2 billion from ads listed on desktop and laptop screens, it has hitherto not identified a credible way to derive similar returns from its users who log in through smartphones and handheld devices. To buy time against these latencies, mitigate threats from competition in the mobile space and uphold the innovative momentum, Facebook has adopted a strategy popular among tech giants in Silicon Valley: acquisitions. Acquisitions by Facebook Over the years, Facebook’s primary competitors have used their vast cash reserves to acquire rival firms and startups that often compete directly with their own technologies and products. Alternatively, firms view acquisitions as a strategy to gain control over a promising new innovation that could provide a synergistic boost to the acquirer’s growth projections25. Facebook has pursued several consolidation‐driven opportunities and made over 30 acquisitions by mid‐2012 (Exhibit 7). Interestingly, the company has merely used cash to finance most of its acquisitions. In some instances, a target was purchased simply to harness the human intellect26. Many recent Facebook acquisitions have been targeted at improving its mobile presence. Just a month prior to the IPO, Facebook purchased Instagram ‐ a mobile app for sharing pictures ‐ for nearly $1 billion in cash and stock. The deal was driven in part by the phenomenal growth in registered users at Instagram27 and was also meant to curb any threats to Facebook’s dominance in the domain of photo sharing. Nevertheless, several critics argued that Facebook had paid an excessive premium for a startup that had no revenues and just 13 employees.
24 A filing with the SEC by public companies to register their securities. 25 Moeller, S., and Brady, C., 2011. Intelligent M&A: Navigating the Mergers and Acquisitions minefield. New York: John Wiley & Sons.
26 Such as engineers, product designers, research scientists etc. 27 Founded in 2010, Instagram had over 30 million users by April 2012.
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Controlled Corporation In taking Facebook public, Zuckerberg followed a well‐known technique for maintaining supermajority control. In fact, founders of Groupon, Zynga and many other companies that had an IPO in the recent past have used the same strategy to preserve command over their firms. Zuckerberg has exercised dominance over his board of directors by structuring Facebook under a dual‐class ownership framework. According to Facebook’s S‐1 Filings, the company’s shares are broadly classified into two main classes, which are principally identical except for one key difference. The IPO intends to offer up to 15.5% ownership to the public through its Class A shares (Exhibit 8). On the other hand, Zuckerberg and other key investors hold Class B shares. Each Class A share is entitled to a single vote while every Class B share is equivalent to 10 votes28. Further, a Class B share is convertible anytime to one share of Class A stock at the discretion of the stockholder. Thus, while Zuckerberg owns just 28% of Facebook, his Class B ownership empowers him with a 57.3% share in voting rights29. In other words, Zuckerberg has the power to appoint or dismiss directors and has the final say in all decisions pertaining to the company’s management and strategy. In fact, the decision to purchase Instagram was solely Zuckerberg’s, and the board was not consulted. Under the rules for NASDAQ‐listed companies, Facebook has been designated a ‘Controlled Company’ due to the overwhelming voting power enjoyed by the firm’s Chairman and CEO. In fact, this categorisation neither obliges having a board comprising a majority of independent directors nor does it require the constitution of independent compensation and nominating committees (Exhibit 9). Zuckerberg may also designate a person of his choice to succeed him as CEO. A study in 2011 by CompStudy, an executive compensation research firm, on over 2,500 technology startups revealed that Zuckerberg and his team have performed remarkably well at averting significant dilution vis‐à‐vis industry peers during all venture capital investment rounds. Zuckerberg has succeeded in growing the company’s value much above the industry average. In fact, Facebook was the only company in the sample whose founders held an equity stake in excess of 75% after the third round of venture capital financing. A comparative overview for the first 3 rounds of financing is provided in Table 130:
Table 1: Valuation of Facebook vs. industry peers Financing Round Industry Average Facebook
Capital raised Pre‐Money Valuation
Capital raised Pre‐Money Valuation
Round 1 $3 million $5 million $0.5 million $5 million Round 2 $5.5 million $10 million $12.7 million $100 million Round 3 $7 million $15 million $27.5 million $525 million
28 http://www.webpronews.com/facebook‐ipo‐shares‐to‐be‐divided‐into‐classes‐2012‐05 29 http://www.bankrate.com/financing/investing/facebook‐and‐dual‐share‐classes/ 30 Wasserman, N., 2012. The Founder’s Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup. New York: Kauffman Foundation Series on Innovation and Entrepreneurship.
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Geographical Restrictions and Reduced Business While Facebook is the most prominent social network in the world, there are some gaping holes in its position within certain markets. Most notably, Facebook has been unable to attain a dominant position in Russia and Brazil where other platforms such as vKontakte and Orkut command a wider market share31. In some cases, governments have censored Facebook citing threats to internal security or for having harmed local religious sentiments. Recently, access to Facebook was restricted during the ‘Arab Spring’32 by dictatorial regimes which endeavored to contain the spread of online protests among citizens. The site was also banned temporarily in Saudi Arabia and Pakistan on allegations that it had aided in the propagation of the controversial cartoons on Prophet Mohammad. Facebook is blocked by the great firewall of the Chinese government, which cites the lack of moderation for this decision (Exhibit 10)33. Users can create pages for political campaigns and can criticise anyone without much oversight. The Chinese government is wary that this could help instigate political uprisings over issues like communist rule and Tibet. Competition The social giant has acknowledged stiff competition from rivals like Google and Twitter besides mobile and internet companies whose products have contested with specific features of Facebook. So far, an interconnected user base combined with the release of features like asymmetrical subscriptions have shielded Facebook from the threats posed by Twitter. Google is aware that binding identity together with user activity is crucial for its ad‐ driven business and is working on Google+, a social networking platform, to realize this goal34. Threat to Personal Information Facebook stores users’ personal data which are at risk of being revealed ‐ either at the discretion of the firm or through hacking. In fact, Facebook’s default privacy policy has gradually shifted towards making certain information ‐ such as users’ name, location, ‘likes’ etc. ‐ public and for use by its advertising clients. Regulators, especially in Europe, have vouched for intense scrutiny of this policy while the US government will audit the firm on how it collects and shares user data for the next 20 years35. Patent Litigations Two months before the IPO, Yahoo sued Facebook accusing the latter of infringing 10 of its patents related to online advertising, prevention of ‘click fraud’ and privacy controls. Both firms announced in mid‐July that a settlement had been reached involving no exchange of cash. According to S‐1 Filings, Facebook had 774 patents in the US and a further 96 in
31 http://www.dreamgrow.com/social‐media‐in‐russia/ 32 Protests and demonstrations against authoritarian regimes in the Arab World since 2010. Source: http://www.foreignaffairs.com/articles/67693/lisa‐anderson/demystifying‐the‐arab‐spring
33 http://www.forbes.com/sites/karstenstrauss/2012/05/18/facebook‐and‐the‐china‐problem/ 34 http://techcrunch.com/2012/02/01/facebooks‐risk‐factors‐mobile‐gov‐slowed‐growth‐google/ 35http://www.nytimes.com/2012/02/27/technology/for‐facebook‐risk‐and‐riches‐in‐user‐ data.html?pagewanted=all
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foreign countries in March 201236. The social site could face further litigations over violations of intellectual property in the future, especially since its services span several technological domains.
What Led to the IPO? Since Facebook’s inception, Zuckerberg had resisted all takeover offers and had even clarified that he was in no hurry to take the company public37. Nevertheless, the company had been accepting investments from companies and private investors from time to time. Shares of Facebook frequently changed hands on private exchanges such as SecondMarket and SharesPost. Initial reluctance of Facebook against going public could no longer be sustained once private ownership exceeded 500 shareholders by mid‐2011. This triggered an ‘infamous’ SEC rule, which compels any private company with over $10 million in assets and more than 500 shareholders on record to adopt similar financial disclosure practices as public, listed companies38. Employees at any typical tech startup work on low salaries and are instead often compensated through stock option grants. These options vest over time, allowing employees to cash in on them by selling in the market. The vesting provision also ensures that employees do not cash out in one go and thus serves as a mechanism for their retention and undisrupted services to the firm. Facebook followed this popular strategy for compensating its first 200 or so employees. Since 2007, Facebook switched to granting ‘Restricted Stock Units (RSUs)’, which could be converted to common stock only upon the company’s IPO. RSUs were also a maneuver, with approval from the SEC, to contain the rise in the shareholder base. Employees were further aggravated when the firm imposed restrictions on selling stock citing insider trading rules. The sole avenue left for employees was to leave the company in order to be able to cash out their stock options. Thus, going public was the best solution for Facebook to retain talent and preserve innovation within the firm. With a rapidly rising user base and increasing content on its platform, Facebook was looking for additional funds to invest in infrastructure and organizational development. The company had to invest in new data centers and research initiatives to improve product quality, enhance the average revenue per user and attract new users. Besides, rising traffic entails higher expenses requiring more data servers, electricity and bandwidth. Facebook’s primary revenue source ‐ online advertising ‐ has weakened as a result of a slump in the broader economy. Nonetheless, the firm faces rising operating costs as it continues to add millions of users every month. The site is now available in more than 70 languages39, which has further accelerated new user registrations (Exhibit 11). Moreover, harnessing revenue flows from its mobile platform necessitates capital for further product development and
36 http://online.wsj.com/article/SB10001424052702303684004577511132642631606.html 37 http://www.cnbc.com/id/46203155/Why_Facebook_IPO_Is_a_Bonanza_for_Wall_Street 38 http://news.cnet.com/8301‐1023_3‐57433719‐93/everything‐you‐need‐to‐know‐about‐the‐facebook‐ipo‐ faq/ 39 http://developers.facebook.com/docs/internationalization/
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acquisitions. Facebook also needs funds for acquiring promising companies and technologies as and when they seem feasible. However, it was progressively more difficult to secure credit from banks and other lenders (Exhibit 12) due to tightening constraints and heightened concerns in credit markets owing to the 2008 financial crisis and its aftermath. Facebook was seeking a $100 million credit line that would help secure leases for data centers that were necessary to keep up with rising user generated content (Exhibit 13). Industry experts point out that Facebook began contemplating an IPO when it could not secure additional debt financing from its principal lender – Bank of America – since the latter was itself busy eliminating its capital deficits with assistance from the federal government. Facebook was further unable to obtain additional credit lines from investors like TriplePoint Capital, which had previously extended a similar facility. Thus, while Facebook was looking to raise debt, it did not reject the possibility of selling an equity stake for the required capital. Lack of adequate credit at a lower cost of capital implied that the time had come for Facebook to open its doors to new investors. The sole stumbling block now, was the company’s valuation. Experts have used different methods and assumptions to value Facebook and have suggested values within a range of $50‐140 billion. Yet, depressed stock markets and widening economic crises in different regions led to concerns that Facebook would find it difficult to sell shares at prices close to the upper range of the spectrum. Facebook has also indicated plans to invest IPO proceeds in marketable securities like money market funds and certificates of deposit. It has further expressed its willingness to pay up to $550 million for securing over 650 patents from AOL Inc.40.
Valuation Opinions on the fair value of the Facebook stock are varied. The firm’s S‐1 Filings indicate that analysts overseeing the valuation and the underwriting process41 used three different methods to value the company’s Class B shares ‐ Discount Cash Flow Method (DCFM), Guideline Public Company Method (GPCM) and the Market Transaction Method (MTM) ‐ and arrived at a price band of $25.54 ‐ $30.07 per share. Facebook reported that it would rely on the MTM method, citing the significant volume of third‐party private stock sale transactions in recent months (Exhibit 14). Despite these estimates, the stock was issued at $38 per share42, a 25% premium to its upper price estimate. The performance of the stock since its debut on May 18, 2012 has been nothing but flabbergasting (Exhibit 15). Critics such as Prof. Aswath Damodaran – a renowned valuation guru from New York Stern School of Business ‐ have raised doubts over Facebook’s performance and the role played by underwriters as Facebook shed more than 30% of its market capitalization within a month. To compare, shares of Apple were trading at a P/E (Price‐to‐Earnings ratio) of 13 while Google was priced at 17 times estimated earnings on
40 http://www.bloomberg.com/news/2012‐05‐18/facebook‐16‐billion‐ipo‐seen‐as‐fuel‐for‐strategic‐deals‐ tech.html 41 Most notably at Morgan Stanley, the lead underwriter. 42 At a total market capitalization of $104.2 billion.
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May 18, 201243. Shares of Facebook were introduced at a staggering P/E multiple of 67. Contrastingly, Exhibit 16 demonstrates that Facebook has generated lower revenues than Google during the first seven years of its existence. Nathan Vardi of Forbes Magazine argues that regulations put in place in response to the internet bubble of the early 2000s might have motivated firms like Facebook to remain private as long as possible44 45. Thus, any prospective growth in Facebook’s intrinsic value had vanished by the time it went public. As another possible point of reference, the leading retailer chain, Wal‐Mart, with revenues in excess of $400 billion and a market capitalisation of $200 billion, trades at an average P/E of 12.746. Despite a lean pre‐tax profit margin of just 5.5%, Wal‐Mart generated an average annual free cash flow (FCF) of about $13 billion during the last 3 years. It is thus surprising that there was so much investor passion for a debutant that had managed a FCF of ‐$171 million for the 2nd quarter of 201247. Table 2 summarizes some key financials for Facebook and puts them in perspective.
Table 2: Facebook’s P/E, revenue and free cash flows against established public firms Facebook Apple Google Wal‐Mart P/E (May 18, 2012) 67.0 13.7 17.2 12.7 Revenue (fiscal year 2011) ($ billions)
$3.7 $142.4 $39.9 $446.9
Total free cash flow (last 3 years) ($ billions)
$1.46 $83.29 $27.79 $37.82
Facebook’s profit margin between 2009 and 2011 was 50%, yet it is expected to fade as growth rates in users and revenues decline over time. In February 2012, Damodaran conducted a DCF analysis assuming that Facebook would attain a best‐case operating margin of 30‐35%, in line with listed and more mature industry rivals like Apple and Google. Using these estimates, he concluded that Facebook stood to earn $44 billion over the next 10 years and priced the company at $29 per share48, valuing the firm at $70 billion. Additional risks such as the need to sustain steady growth rates49 and concentration of power with the CEO may necessitate further discounts to the share price50. For more information on Damodaran’s valuation, please refer to Exhibit 1751. Comparable Companies This section provides a comparative overview of Facebook against prominent startup companies that went public in or after 2011. The firms considered here ‐ LinkedIn (LNKD), Zynga (ZNGA), Groupon (GRPN) and Pandora (P) ‐ are popular internet firms whose business model is similar to Facebook’s, and whose growth potential is analyzed by 43 Based on earnings estimates for 2013. 44 http://www.forbes.com/sites/nathanvardi/2012/07/26/with‐facebook‐earnings‐the‐second‐internet‐bubble‐ is‐over/ 45 For example, compliance with the Sarbanes‐Oxley act involves huge costs. Hence, smaller firms avoid going public unless the monetary benefits exceed expenses involved.
46 http://ycharts.com/companies/WMT/pe_ratio 47 http://ycharts.com/companies/FB/free_cash_flow 48 http://www.stern.nyu.edu/~adamodar/pc/blog/facebookIPO.xls 49 For example, through acquisitions like Instagram. 50 http://www.businessinsider.com/what‐is‐facebook‐worth‐2012‐5 51 Alternatively, conduct your own valuation using the Financial Times Valuation Tool at: http://www.ft.com/intl/cms/s/2/ff589e40‐8d3a‐11e1‐8b49‐00144feab49a.html#axzz24fG3x6NE
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examining its latest P/E and Price‐to‐Sales (P/S) ratios. The projected revenues and earnings estimates per share are shown in Table 352:
Table 3: Comparison of growth and earnings estimates
Revenue Growth (2012)
EPS Growth (2012)
P/S (2012)
P/S (2013)
P/E (2012)
P/E (2013)
Analyst Opinion (1 = strong buy, 5 = strong sell)
Facebook 33.5% 25.6% 11.15 8.54 47.91 39.80 2.4
LinkedIn 74.1% 94.3% 10.57 7.12 136.76 76.23 2.4
Zynga 25.4% 12.5% 2.91 2.40 21.22 15.49 2.4
Groupon 47.7% N/A 2.63 2.04 54.39 13.99 2.6
Pandora 54.9% N/A 4.00 2.79 N/A 205.60 2.3
It is clear that Facebook has the second lowest growth estimates amongst other comparable companies. As expected, Zynga has the lowest growth rates since a majority of its revenues are derived from games hosted on Facebook. Visibly, Facebook enjoys a higher share price despite lower growth prognoses. The valuation would be further distorted if one considers employee stock options, which when exercised would put additional downward pressure on the stock price. Table 3 equally shows that analysts were relatively indifferent to the Facebook stock against other recent IPOs. In fact, analysts had downgraded expectations due to poor revenue outlooks for the first half of 2012. Manifestly, all these companies have tremendous outlooks. Nonetheless, only time will tell whether their respective business models are robust enough to deliver the revenues and growth predictions that are implicitly assumed within current valuation levels.
The Underwriters IPOs are generally prepared and facilitated by individual or groups of investment banks known as ‘Underwriters’. The underwriters then approach would‐be investors through a series of roadshows and advertisement campaigns in an attempt to sell shares. Morgan Stanley was designated as the main or ‘lead’ underwriter for Facebook’s IPO. Besides, as many as 31 additional investment banks were included to improve the prospects of the proposed offering. Thus, some of the most prestigious investment banks, including JPMorgan, Goldman Sachs, Barclays and Bank of America Merrill Lynch, had the opportunity to participate in this multi‐billion dollar bonanza. A list of all underwriters is provided in Exhibit 18. The underwriters would charge a commission fee of 1.1% or $176 million for managing the $16 billion IPO. Banks have normally charged an average underwriting fee of 3.6% for similar high profile initial public offerings in the US markets53. However, underwriters in this case were willing to take a fee cut as they would earn above‐ average revenues by participating in this giant IPO. Besides, this would open up similar mandates in the future54.
52 http://seekingalpha.com/article/640951‐facebook‐s‐valuation‐seems‐socially‐unacceptable 53 IPO fees are linked directly to the reputation of the underwriting banks. 54 http://www.businessweek.com/news/2012‐05‐18/facebook‐underwriters‐to‐split‐about‐176‐million‐in‐ipo‐ fees
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IPOs can be classified into several types. One method of issuing new shares is through a ‘Dutch Auction’ or a direct sale to the public 55. A ‘best‐efforts’ approach is the preferred method for smaller IPOs. As the name suggests, such IPOs do not guarantee a particular price or amount raised. The underwriters try to sell as much as they can, depending on investor appetite for the stock. In contrast, Facebook’s IPO was based on a ‘firm commitment’ by its underwriters56. This popular method entails the underwriter to assume all inventory risk by purchasing shares from the firm for resale to the public57.
Additional Facts & Figures IPO Roadshow Facebook’s management team adopted an unconventional method of promoting the company during its roadshows with investors. Rather than use regular PowerPoint presentations to highlight the company’s achievements and potential, the team initially relied on a 30‐minute video presentation that sought to project social connectivity as the future of business. The video was dropped later as investors expressed dissatisfaction over the limited time allotted for questions. Zuckerberg’s appearance in a casual hoodie and jeans for meetings with suit‐savvy institutional investors was also criticized in the media as ‘rebellious’58. Cuts to Price Estimate by Analysts Initially, analysts had revised the target price band upwards to $28‐$35 per share. Still, in the midst of the IPO roadshows, the company’s lead underwriters59 slashed earnings forecasts60. Besides being an unprecedented and potentially disrupting move, this news was passed on to only a handful of big investors, thereby dampening their interest61. This practice also violated several securities laws and attracted lawsuits from the SEC and smaller investors, who were willing to pay a higher price based upon asymmetric information. Simultaneously, analysts at Morgan Stanley and other underwriters lowered revenue forecasts for 2012 from $5 billion to $4.85 billion. Revenue projections for the 2nd quarter of 2012 were also revised from $1.175 billion to $1.111 billion just a week before the IPO62. Facebook and its underwriters appear to have made use of the ‘silent period’‐rule63 and have thus chosen to restrict the outflow of any negative information into the public domain. Market experts have compared this selective disclosure to the non‐standard
55 Here, investors make actual bids to buy shares at a specific price; this method was adopted in Google’s IPO. 56http://seekingalpha.com/instablog/2719951‐proffowler123/642801‐facebook‐ipo‐and‐types‐of‐ipos‐and‐ after‐market‐support‐fb 57 http://www.investopedia.com/terms/f/firmcommitment.asp#axzz24fTFz3Fv 58 http://www.inc.com/tim‐donnelly/facebook‐changing‐the‐ipo‐roadshow.html 59 Morgan Stanley, JPMorgan and Goldman Sachs. 60 Due to renewed caution over declining revenue growth owing to lack of credible revenues from mobile users. 61http://finance.yahoo.com/blogs/daily‐ticker/facebook‐bankers‐secretly‐cut‐facebook‐revenue‐estimates‐ middle‐133648905.html
62 http://www.reuters.com/article/2012/05/22/us‐facebook‐forecasts‐idUSBRE84L06920120522 63 An SEC rule that restricts a company from disclosing information until the time when the SEC deems the firm’s registration statement effective (usually 40 days after the IPO).
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accounting measure known as ‘Adjusted Consolidated Segment Operating Income (ACSOI)’ devised by Groupon64 to conceal its real profitability from prospective investors. Frequent Amendments to the S‐1 Filings Facebook filed a number of amendments to its S‐1 Filing, which increasingly suggested a firm having trouble maintaining growth (Exhibit 19). Novice investors were unaware of or unable to deduce the real firm potential from these signals and were thus caught up in the excitement that had gripped the markets. Lock‐up Periods As per Facebook’s S‐1 Filings, a number of early investors have the option to liquidate shares after certain periods subsequent to the IPO. Jay Ritter of the University of Florida says that besides such additional supply, the markets do not like executives or early investors selling their stocks65. In fact, over 2 billion incremental shares are available for sale as several lock‐up periods expire (Exhibit 20). Increase in Number of Shares Offered Three days before the IPO, Facebook’s Chief Financial Officer David Ebersman decided to increase the number of shares on offer by 25%. These shares would be offloaded by principal investors like Goldman Sachs and Digital Sky Technologies66 (Exhibit 21). Ebersman was assured by Morgan Stanley that there was a lot of demand for the stock due to immense media exposure and exhilaration. This decision eliminated any scope of a real surge in the stock price during the first day of trading. Greenshoe Provision: Over‐allotment Option Facebook’s latest amendment prior to the IPO suggests that there were up to 421 million shares for sale. Yet, the underwriters sold over 484 million shares at a price of $38 during the stock debut by way of the greenshoe provision, which gave them an option to offer 63 million additional shares given the extensive demand for the stock. Economic Constraints Financial markets were highly depressed in May 2012 owing to economic problems in various parts of the world. The United States had just emerged from a major financial crisis and was still struggling to maintain continued growth. Greece and several southern European countries had amassed unsustainable levels of debt and were finding it difficult to fulfill debt obligations to such an extent that the very existence of the European monetary union was on tenterhooks. Growth had also stalled in major emerging economies like China, India and Brazil due to internal problems. In such a bleak economic scenario, garnering widespread investor attention and raising capital to the tune of $16 billion would be an uphill task.
64 As part of disclosures in its S‐1 Filings. 65 http://abcnews.go.com/Business/millions‐facebook‐shares‐coming/story?id=16463075#.UD0Lu9Ygc70 66 http://www.forbes.com/sites/nathanvardi/2012/05/23/the‐rush‐for‐the‐exits‐doomed‐facebooks‐stock/
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Effect of Private Share Markets Facebook shares have experienced a phenomenal upsurge in the private market ever since news of an upcoming started going around. Shares have gained over 400% in the last 2 years prior to the public equity issue, taking the value of the firm beyond $100 billion. Technical Issues Although shares were supposed to go on sale at 11 AM on May 18, 2012, an error in NASDAQ’s trade processing system delayed the debut by 30 minutes. Subsequently, over 200 million shares exchanged hands during the first hour of trading. The first day was shockingly marred by delays and confusion. Unresolved technical glitches at NASDAQ’s servers led to improper order processing due to which investors could not receive appropriate order confirmation67. Unsure about their current positions, nervous traders issued millions of cancel orders to reconcile earlier requests, which further surged incoming traffic at the exchange. Infrequent communication and lack of transparency from NASDAQ, combined with a choked exchange infrastructure resulted in losses amounting to $115 million for investors and market makers68.
Post‐IPO Performance After reaching an intra‐day peak of $45, Facebook shares closed at $38.23 (a mere 0.6% above the opening price) on the first day of trading. The company‘s market capitalization dropped by $11.5 billion on the second day, as the stock closed at $34.0369. Reuters reported that Morgan Stanley spent up to $2 billion to sustain the stock price above the $38 mark by absorbing much of the selling on the opening day. This proved ineffective though as the stock slid by 10% on the next day. Investors turned cautious as they became suspicious of the company’s long‐term viability and its capability to generate revenues from its colossal user base. Furthermore, speculation had prompted immense short‐selling that put further downward pressure on the shares. Priscilla Chan, Zuckerberg’s girlfriend, may have made a smart move by marrying him during the same weekend when the IPO took place. However, the timing could do little to calm the negative mood that had engulfed the markets. 91 days into the IPO, shares plunged further as the first lock‐up period expired. Facebook’s dismal quarterly performance at a net loss of $157 million (Q2 2012) led to a further share price decline. On August 28, 2012, Facebook was trading at $19.34 per share, nearly 50% below its IPO price (Exhibit 22). In September 2012, Morgan Stanley and JPMorgan Chase, the two biggest Facebook’s IPO underwriters, cut long‐term outlooks and price targets, to $32 and $30, respectively70. In the aftermath of the Facebook IPO, several firms such as Kayak and vKontakte delayed their stock debuts citing the social giant’s catastrophic undertaking and the ensuing poor (IPO) market conditions71. Markets were so depressed that even a pledge by Zuckerberg in
67 http://www.techspot.com/news/48665‐facebook‐ipo‐affected‐by‐nasdaq‐technical‐issues.html 68 http://www.reuters.com/article/2012/05/26/us‐facebook‐problems‐idUSBRE84P00Y20120526 69 http://www.crainsnewyork.com/article/20120521/TECHNOLOGY/120529997 70 http://www.ft.com/intl/cms/s/0/64264e22‐f6da‐11e1‐827f‐00144feabdc0.html#axzz28tDX3zfF 71 http://www.valuewalk.com/2012/06/firms‐delay‐ipos‐facebook‐or‐jobs‐act/
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September 2012 promising not to sell personal shares for at least 1 year barely had a mild and momentary impact on the share price72.
72 http://www.usatoday.com/money/perfi/stocks/story/2012‐09‐04/facebook‐stock‐lockup‐period‐on‐sales‐for‐ workers/57585118/1
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CASE 2012‐14‐C
Suggested Assignment Questions
1. An IPO marks a strategic milestone for a company. a. Explain the advantages and pitfalls associated with an IPO, i.e. what are the
benefits and drawbacks of going public? b. What motivated Facebook to go public?
2. Facebook had several avenues to raise funds.
a. Why was it relatively easier for Facebook to raise capital from the stock markets over debt? Was an IPO the most suitable choice?
b. Should Facebook invest IPO proceeds in financial securities?
3. It is incorrect to state that Facebook raised $16 billion through its IPO. Why?
4. Facebook offered only Class A stock through the IPO. a. Who are the primary purchasers of these shares? b. How would new investors be affected by the dual‐class share structure?
5. The underwriting investment bank takes on a central role in the IPO process.
a. What are key tasks executed by the underwriter? b. What are primary considerations when selecting an underwriter? c. Often, multiple underwriters are involved. What are main motivations for
syndication?
6. The issue prospectus and roadshows serve to attract potential shareholders. Why do investors dislike outlook revisions during the IPO process?
7. Analyze the performance of the Facebook (FB) stock since its IPO debut.
a. Why were underwriters forced to lend aftermarket support upon stock debut?
b. How is the share price likely to be impacted with successive lock‐up period expirations?
8. Facebook used several methods to price its stock. a. Assess Facebook’s issue price in light of the valuation data and parameters
provided in the case within DCF (Discounted Cash Flow) and CCA (Comparable Companies Analysis) techniques.
b. Evaluate the valuation performed by Prof. Damodaran (Exhibit 17). c. Underwriters valued Class B shares, while the stock offered at IPO involved
Class A shares. Is this a correct approach?
9. So far, Facebook has issued over 400 million Employee Stock Options (ESOP) and Restricted Stock Units (RSU). How can these securities be valued, and how do they affect Facebook’s financial statements?
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CASE 2012‐14‐C
Exhibit 1 Historical Timeline of Facebook
Source: Securities & Exchanges Commission (SEC)73
73 http://www.sec.gov/Archives/edgar/data/1326801/000119312512034517/d287954ds1.htm
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CASE 2012‐14‐C
Exhibit 2 Rounds of Venture Capital Funding
Source: Crunchbase74
74 http://www.crunchbase.com/company/facebook
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CASE 2012‐14‐C
Exhibit 3 Ownership Stakes of Founders and Management Team
Source: The Daily Mail, United Kingdom75
75 http://www.dailymail.co.uk/news/article‐2146082/Facebook‐IPO‐Shares‐priced‐38‐valuing‐social‐network‐ 104billion.html
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CASE 2012‐14‐C
Exhibit 4 Income Statement
Year Ended December 31, Three Months
Ended March 31,
All Figures in US Dollars 2007 2008 2009 2010 2011 2011 2012 Consolidated Statements of Operations Data: Revenue 153 272 777 1,974 3,711 731 1,058 Costs and expenses(1) :
Cost of revenue 41 124 223 493 860 167 277 Marketing and sales 32 76 115 184 427 68 159 Research and development 81 47 87 144 388 57 153 General and administrative 123 80 90 121 280 51 88
Total costs and expenses 277 327 515 942 1,955 343 677 Income (loss) from operations ‐124 ‐55 262 1,032 1,756 388 381 Interest and other income (expense), net ‐11 ‐1 ‐8 ‐24 ‐61 10 1 Income (loss) before provision for income taxes ‐135 ‐56 254 1,008 1,695 398 382 Provision for income taxes 3 — 25 402 695 165 177 Net income (loss) ‐138 ‐56 229 606 1 233 205 Net income (loss) attributable to Class A and Class B common
stockholders ‐138 ‐56 122 372 668 153 137
Earnings (loss) per share attributable to Class A and Class B common stockholders(2):
Basic (0.16) (0.06) 0.12 0.34 0.52 0.12 0.10 Diluted (0.16) (0.06) 0.10 0.28 0.46 0.11 0.09
Pro forma earnings per share attributable to Class A and Class B common stockholders(2):
Basic 0.49 0.10 Diluted 0.43 0.09 Source: Amendment No. 8 to Facebook’s S‐1 Filings with the Securities & Exchanges Commission
(SEC) 76
Exhibit 5 Balance Sheet
As of December 31, As of March 31,
All Figures in US Dollars 2007 2008 2009 2010 2011 2012 Consolidated Balance Sheets Data: Cash, cash equivalents, and marketable securities 305 297 633 1,785 3,908 3,91 Working capital 250 279 703 1,857 3,705 3,655 Property and equipment, net 82 131 148 574 1,475 1,855 Total assets 448 505 1,109 2,99 6,331 6,859 Total liabilities 174 170 241 828 1,432 1,587 Total stockholders’ equity 273 335 868 2,162 4,899 5,272
Source: Amendment No. 8 to Facebook’s S‐1 Filings with the Securities & Exchanges
Commission (SEC) 77
76http://www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm#toc287954_ 19 77http://www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm#toc287954_ 19
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Exhibit 6 Cash Flow Statement
Year Ended December 31, Three Months
Ended March 31,
All Figures in US Dollars 2007 2008 2009 2010 2011 2011 2012 Net cash provided by operating activities 11 8 155 698 1,549 345 441 Purchases of property and equipment ‐55 ‐70 ‐33 ‐293 ‐606 ‐153 ‐453 Property and equipment acquired under capital
leases ‐11 ‐26 ‐56 ‐217 ‐473 ‐211 ‐38 Free cash flow (55) (88) 66 188 470 (19) (50)
Source: Amendment No. 8 to Facebook’s S‐1 Filings with the Securities & Exchanges
Commission (SEC) 78
78http://www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm#toc287954_ 19
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CASE 2012‐14‐C
Exhibit 7 List of Acquisitions by Facebook
Acquisition date
Company Business Location Value (USD) Used as / Integrated with
23‐Aug‐2005 facebook.com domain name
AboutFace Boston 200000 name change from Thefacebook.com
19‐Jul‐2007 Parakey Offline applications/Web OS Mountain View, CA Facebook Mobile 23‐Jun‐2008 ConnectU Social networking Cambridge, MA $31m (Court settlement) 10‐Aug‐2009 FriendFeed Social networking aggregator Mountain View, CA $47.5m 19‐Feb‐2010 Octazen Contact importer Taman Melawati,Kuala Lumpur Friend Finder 2‐Mar‐2010 Divvyshot Photo management San Francisco Facebook Photos 13‐May‐2010 Friendster patents Intellectual property/Patents Mountain View, CA / Kuala
Lumpur $40m
26‐May‐2010 ShareGrove Private conversations/Forums San Mateo, CA Facebook Groups 8‐Jul‐2010 Nextstop Travel recommendations San Francisco $2.5m 15‐Aug‐2010 Chai Labs Internet applications Mountain View, CA $10m 20‐Aug‐2010 Hot Potato Check‐ins/Status updates Brooklyn ~10m Facebook Places 29‐Oct‐2010 Drop.io File hosting and sharing Dumbo, Brooklyn ~10m 15‐Nov‐2010 FB.com domain name American Farm Bureau Federation Washington, D.C. $8.5m — 25‐Jan‐2011 Rel8tion Mobile advertising Seattle undisclosed 2‐Mar‐2011 Beluga Group messaging Palo Alto, CA undisclosed Facebook Messenger 20‐Mar‐2011 Snaptu Mobile App Developer Israel $60–70m Mobile 24‐Mar‐2011 RecRec Computer Vision San Francisco undisclosed 27‐Apr‐2011 DayTum Information graphics SoHo, New York City 9‐Jun‐2011 Sofa Software design Amsterdam 9‐Jun‐2011 MailRank Email prioritization New York 2‐Aug‐2011 Push Pop Press Digital publishing Undisclosed 10‐Oct‐2011 Friend.ly Q&A app Mountain View, California Undisclosed 8‐Nov‐2011 Strobe HTML 5 mobile apps,SproutCore San Francisco Undisclosed Mobile engineering team 2‐Dec‐2011 Gowalla Location Based Service Austin 9‐Apr‐2012 Instagram Photo sharing San Francisco $1b 13‐Apr‐2012 Tagtile Customer loyalty app San Francisco,CA Undisclosed 5‐May‐2012 Glancee Social discovery platform San Francisco, CA Undisclosed 15‐May‐2012 Lightbox Photo sharing London Undisclosed 21‐May‐2012 Karma Social Gifting USA Undisclosed 18‐Jun‐2012 Face.com Face Recognition Platform Tel Aviv, Israel $100m 14‐Jul‐2012 Spool Mobile bookmarking and sharing
content San Francisco,CA Undisclosed Mobile engineering team
20‐Jul‐2012 Acrylic Software RSS app Pulp + secure database appWallet
Vancouver Undisclosed Facebook's design team
Source: Wikipedia79
79 http://en.wikipedia.org/wiki/List_of_acquisitions_by_Facebook
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Exhibit 8 First Page of Facebook’s S‐1 Filing
Source: Securities & Exchanges Commission (SEC)
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Exhibit 9 Board of Directors
Facebook, Inc. INSIDERS Name Title Age
Mark Zuckerberg Founder, Chairman of the Board and Chief Executive Officer
28
Sheryl Sandberg Chief Operating Officer and Director 43
Other Board Members
Name Primary Company
James Breyer Breyer Capital 51
Donald Graham The Washington Post Company 67
Erskine Bowles Carousel Capital Partners LP 67
Peter Thiel J.D. The Thiel Foundation 45
Marc Andreessen Andreessen Horowitz 41
Ronald Conway FitOrbit, Inc. 60
Reed Hastings Netflix, Inc. 50
Source: Bloomberg BusinessWeek80
80 http://investing.businessweek.com/research/stocks/private/board.asp?privcapId=20765463
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Exhibit 10 Dominant Social Networking Sites by Country
Source: Vincenzo Cosenza81
81 www.vincos.it
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Exhibit 11 The Facebook Nation
Source: Economist82
82 http://www.economist.com/blogs/graphicdetail/2012/02/daily‐chart‐0
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CASE 2012‐14‐C
Exhibit 12 Net Percentage of Banks Tightening Credit to Larger Companies
Source: Bloomberg83
Exhibit 13 Key User Statistics
Source: Securities & Exchanges Commission (SEC)
83 http://www.bloomberg.com/news/2012‐02‐07/slower‐job‐growth‐seen‐as‐banks‐tighten‐credit‐chart‐of‐the‐ day.html
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th e c a
s e
c e
n tr
e .o
r g
T a u g h t b y A
r if K
h u r s h e d , fr
o m
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8 - F
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r d e r r
e f F
3 8
6 7
9 9
.
P u r c h a s e d f o r u
s e o
n t h e F
o u n d a ti o n s o
f F
in a n c e , a t T
h e U
n iv
e r s it y o
f M
a n c h e s te
r W
o r ld
w id
e L
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ca tio
na l m
at er
ia l s
up pl
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by T
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as e
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nc od
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76 H
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9I O
rd er
r ef
er en
ce F
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28
CASE 2012‐14‐C
Exhibit 14 Facebook’s Performance on Private Exchanges
Source: SecondMarket84
Exhibit 15 Facebook Stock Performance Since IPO
Source: Google Finance, 2012
84 https://www.secondmarket.com/facebook‐on‐secondmarket/#time‐12
112-052-1
U s a g e p
e r m
it te
d o
n ly
w it h in
t h e s e p
a r a m
e te
r s o
th e r w
is e c
o n ta
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fo @
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s e
c e
n tr
e .o
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r if K
h u r s h e d , fr
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2 - N
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r d e r r
e f F
3 8
6 7
9 9
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s e o
n t h e F
o u n d a ti o n s o
f F
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n iv
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f M
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r W
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e L
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ca tio
na l m
at er
ia l s
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by T
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as e
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76 H
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9I O
rd er
r ef
er en
ce F
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29
CASE 2012‐14‐C
Exhibit 16 Revenues for Popular Tech Companies for First Seven Years
Source: Business Insider85
85 http://www.businessinsider.com/what‐is‐facebook‐worth‐2012‐5
112-052-1
U s a g e p
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it te
d o
n ly
w it h in
t h e s e p
a r a m
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th e r w
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r d e r r
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3 8
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s e o
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76 H
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9I O
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38 67
99 CA SE 2 01 2‐ 14
‐C
Ex hi bi t 17
Sa m pl e Va
lu at io n of F ac eb
oo k Sh ar es
Ba
se y ea r
1 2
3 4
5 6
7 8
9 10
Te rm
in al y ea r
Re ve nu
e gr ow
th r at e
40 .0 0%
40
.0 0%
40
.0 0%
40
.0 0%
40 .0 0%
32 .4 0%
24
.8 0%
17
.2 0%
9. 60
%
2. 00 %
2. 00
%
Re ve nu
es
3, 71
1. 00
5, 19
5. 40
7, 27
3. 56
10
,1 82
.9 8
14 ,2 56
.1 8
19 ,9 58
.6 5
26 ,4 25
.2 5
32 ,9 78 .7 1
38 ,6 51
.0 5
42 ,3 61
.5 5
43 ,2 08
.7 8
44 ,0 72
.9 6
EB IT (O
pe ra tin
g) m
ar gi n
45 .6 8%
44 .6 1%
43
.5 4%
42
.4 7%
41
.4 1%
40 .3 4%
39 .2 7%
38
.2 0%
37
.1 4%
36
.0 7%
35 .0 0%
35
.0 0%
EB
IT (O
pe ra tin
g in co m e)
1, 69
5. 00
2, 31
7. 54
3, 16
6. 91
4, 32
4. 97
5, 90
2. 77
8, 05
0. 82
10 ,3 77
.2 0
12 ,5 98 .6 9
14 ,3 53
.0 7
15 ,2 78
.7 5
15 ,1 23
.0 7
15 ,4 25
.5 4
Ta x ra te (t )
40 .0 0%
40 .0 0%
40
.0 0%
40
.0 0%
40
.0 0%
40 .0 0%
39 .0 0%
38
.0 0%
37
.0 0%
36
.0 0%
35 .0 0%
35
.0 0%
EB
IT (1 ‐t )
1, 01
7. 00
1, 39
0. 52
1, 90
0. 15
2, 59
4. 98
3, 54
1. 66
4, 83
0. 49
6, 33
0. 09
7, 81 1. 19
9, 04
2. 43
9, 77
8. 40
9, 83 0. 00
10
,0 26
.6 0
‐ Re
in ve st m en
t
98 9. 60
1, 38
5. 44
1, 93
9. 62
2, 71
5. 46
3, 80
1. 65
4, 31
1. 07
4, 36 8. 97
3, 78
1. 56
2, 47
3. 67
56 4. 82
1, 00
2. 66
FC FF (F re e Ca sh F lo w to
F ir m )
40 0. 92
51
4. 71
65
5. 37
82
6. 20
1, 02
8. 85
2, 01
9. 02
3, 44 2. 22
5, 26
0. 87
7, 30
4. 74
9, 26 5. 18
9, 02
3. 94
N O L
0. 00
0. 00
0. 00
0. 00
0. 00
0. 00
0. 00
0. 00
0. 00
0. 00
0. 00
0. 00
Co
st o f C
ap ita
l
11 .4 2%
11
.4 2%
11
.4 2%
11
.4 2%
11 .4 2%
10 .7 4%
10
.0 5%
9. 37
%
8. 68
%
8. 00 %
8. 00
%
Cu m ul at ed
d is co un
t f ac to r
0. 89
75 0. 80
55 0. 72
30 0. 64
89 0. 58
24
0. 52
59 0. 47 79
0. 43
69 0. 40
20 0. 37 22
Pr es en
t V al ue
(P V)
35 9. 83
41
4. 60
47
3. 80
53
6. 08
59 9. 15
1, 06
1. 79
1, 64 4. 89
2, 29
8. 61
2, 93
6. 61
3, 44 8. 83
Te rm
in al c as h flo
w
9, 02
3. 94
Te rm
in al c os t o
f c ap ita
l 8. 00
%
Te rm
in al v al ue
15
0, 39
8. 97
PV (T er m in al v al ue
) 55
,9 83
.8 4
PV
(C F ov er n ex t 1
0 ye ar s)
13 ,7 74
.1 8
Su m o f P
V 69
,7 58
.0 2
Pr oc ee ds if fi rm
fa ils =
34 ,8 79
.0 1
V al ue
o f o
pe ra tin
g as se ts =
69 ,7 58
.0 2
D eb
t 1, 21
4. 91
Ca sh
1, 51
2. 00
V al ue
o f e
qu ity
70
,0 55
.1 2
‐ V al ue
o f o
pt io ns
3, 08
8. 49
V al ue
o f e
qu ity
in c om
m on
s to ck
66 ,9 66
.6 3
N um
be r of s ha re s
2, 33
3. 90
Es ti m at ed
v al ue
/ sh ar e
$ 28
.6 9
Pr ic e
$ 38
.0 0
Pr ic e as % o f v al ue
13
2. 44 %
112-052-1
U s a g e p
e r m
it te
d o
n ly
w it h in
t h e s e p
a r a m
e te
r s o
th e r w
is e c
o n ta
c t in
fo @
th e c a
s e
c e
n tr
e .o
r g
T a u g h t b y A
r if K
h u r s h e d , fr
o m
2 - N
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r d e r r
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3 8
6 7
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.
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s e o
n t h e F
o u n d a ti o n s o
f F
in a n c e , a t T
h e U
n iv
e r s it y o
f M
a n c h e s te
r W
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w id
e L
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ca tio
na l m
at er
ia l s
up pl
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by T
he C
as e
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tr e
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yr ig
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nc od
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76 H
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K -P
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9I O
rd er
r ef
er en
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38 67
99 CA SE 2 01 2‐ 14
‐C
Im
pl ie d va ri ab
le s
Ba se y ea r
1 2
3 4
5 6
7 8
9 10
A ft er y ea r 10
Sa le s to c ap ita
l r at io
1. 50
1. 50
1. 50
1. 50
1. 50
1. 50
1. 50
1. 50
1. 50
1. 50
In ve st ed
c ap ita
l 4, 93
0. 91
5, 92
0. 51
7, 30
5. 95
9, 24
5. 56
11
,9 61
.0 3
15 ,7 62
.6 7
20 ,0 73
.7 4
24 ,4 42 .7 2
28 ,2 24
.2 8
30 ,6 97
.9 4
31 ,2 62
.7 6
RO
IC (R
et ur n on
In ve st ed
C ap ita
l) 20 .6 3%
23 .4 9%
26
.0 1%
28
.0 7%
29
.6 1%
30 .6 5%
31 .5 3%
31
.9 6%
32
.0 4%
31
.8 5%
31 .4 4%
20
.0 0%
So ur ce : D
am od
ar an , 2 01 28
6
86 h tt p: // w w w .s te rn .n yu .e du
/~ ad am
od ar /p c/ bl og /f ac eb
oo kI PO
.x ls
112-052-1
U s a g e p
e r m
it te
d o
n ly
w it h in
t h e s e p
a r a m
e te
r s o
th e r w
is e c
o n ta
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fo @
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s e
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n tr
e .o
r g
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r if K
h u r s h e d , fr
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2 - N
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r d e r r
e f F
3 8
6 7
9 9
.
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s e o
n t h e F
o u n d a ti o n s o
f F
in a n c e , a t T
h e U
n iv
e r s it y o
f M
a n c h e s te
r W
o r ld
w id
e L
im it e
d .
E du
ca tio
na l m
at er
ia l s
up pl
ie d
by T
he C
as e
C en
tr e
C op
yr ig
ht e
nc od
ed A
76 H
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9I O
rd er
r ef
er en
ce F
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32
CASE 2012‐14‐C
Exhibit 18 List of Underwriters
Underwriter Number of Shares 1 Morgan Stanley & Co. LLC 162,174,942 2 J.P. Morgan Securities LLC 84,878,573 3 Goldman, Sachs & Co. 63,185,042 4 Merrill Lynch, Pierce, Fenner & Smith Incorporated 27,380,185 5 Barclays Capital Inc. 27,380,185 6 Allen & Company LLC 8,424,672 7 Citigroup Global Markets Inc. 9,477,755 8 Credit Suisse Securities (USA) LLC 9,477,755 9 Deutsche Bank Securities Inc. 9,477,755 10 RBC Capital Markets, LLC 4,212,336 11 Wells Fargo Securities, LLC 4,212,336 12 Blaylock Robert Van LLC 673,974 13 BMO Capital Markets Corp. 421,234 14 C.L. King & Associates, Inc. 631,850 15 Cabrera Capital Markets, LLC 421,234 16 CastleOak Securities, L.P. 673,974 17 Cowen and Company, LLC. 421,234 18 E*TRADE Securities LLC 210,617 19 Itaú BBA USA Securities, Inc. 210,617 20 Lazard Capital Markets LLC 421,234 21 Lebenthal & Co., LLC 673,974 22 Loop Capital Markets LLC 673,974 23 M.R. Beal & Company 673,974 24 Macquarie Capital (USA) Inc. 421,234 25 Muriel Siebert & Co., Inc. 673,974 26 Oppenheimer & Co. Inc. 421,234 27 Pacific Crest Securities LLC 421,234 28 Piper Jaffray & Co. 421,234 29 Raymond James & Associates, Inc. 421,234 30 Samuel A. Ramirez & Company, Inc. 631,850 31 Stifel, Nicolaus & Company, Incorporated 421,234 32 The Williams Capital Group, L.P. 589,727
Total: 421,233,615
Source: Amendment No. 8 to Facebook’s S‐1 Filings with the Securities & Exchanges Commission (SEC)87
87http://www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm#toc287954_19
112-052-1
U s a g e p
e r m
it te
d o
n ly
w it h in
t h e s e p
a r a m
e te
r s o
th e r w
is e c
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fo @
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h u r s h e d , fr
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r d e r r
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3 8
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.
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s e o
n t h e F
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f F
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n iv
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a n c h e s te
r W
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ca tio
na l m
at er
ia l s
up pl
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by T
he C
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C en
tr e
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yr ig
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nc od
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76 H
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rd er
r ef
er en
ce F
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33
CASE 2012‐14‐C
Exhibit 19 Timeline of Changes to S‐1 Filing88
Feb 1, 2012: Facebook announced plans for its IPO in an official Form S‐1 SEC Filing. x Facebook says it has 845 million monthly active users (MAU), 2.7 billion likes and comments
per day, 250 million photos uploaded per day and 100 billion friendships.
March 7, 2012: Facebook files Amendment No. 2 to Form S‐1 . April 23, 2012: Facebook files Amendment No. 4 to Form S‐1 and says Q1 net profits fell 12% to $205 million due to higher expenses
x Facebook says it has 901 million monthly active users, 3.2 billion likes and comments per day, 300 million photos uploaded per day and 125 billion friendships.
May 3, 2012: Facebook files Amendment No. 5 to Form S‐1 where it sets a price range of $28 to $35 for its IPO
x Facebook, Inc. is offering 180,000,000 shares of its Class A common stock and the selling stockholders are offering 157,415,352 shares of Class A common stock. Anticipated initial public offering price between $28.00 and $35.00 per share.
x Total Shares Offered = 337,415,352
May 9, 2012: Facebook files Amendment No. 6 to Form S‐1 expressing caution about revenue growth due to rapid shift by users to using mobile devices to access Facebook where they are not making much money from advertising. Excerpts from the S‐1 Amendment: May 15, 2012: Facebook files Amendment No. 7 to Form S‐1 increasing the IPO price range to $34 to $38 per share.
x Anticipated initial public offering price between $34.00 and $38.00 per share. x Total Shares Offered = 337,415,352
May 16, 2012: Facebook files Amendment No. 8 to Form S‐1 increasing the number of shares offered by 84 million shares to a total offering of 421,233,615 shares.
x Facebook, Inc. is offering 180,000,000 shares of its Class A common stock and the selling stockholders are offering 241,233,615 shares of Class A common stock.
x Total Shares Offered = 421,233,615
88 http://kirklindstrom.com/Articles/2012/0524_Facebook_IPO_Facts_and_History.html
112-052-1
U s a g e p
e r m
it te
d o
n ly
w it h in
t h e s e p
a r a m
e te
r s o
th e r w
is e c
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3 8
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s e o
n t h e F
o u n d a ti o n s o
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n iv
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a n c h e s te
r W
o r ld
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e L
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d .
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ca tio
na l m
at er
ia l s
up pl
ie d
by T
he C
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CASE 2012‐14‐C
Exhibit 20 Various Lock‐up Periods
Time since S‐1 Filing (16th May, 2012) No. of shares available for sale 91 days 268,113,248 shares by investors other than Zuckerberg
151‐180 days 137,000,000 Pre‐2011 RSUs held by directors 55,000,000 outstanding shares 55,000,000 stock options held by employees other than Zuckerberg
181 days 1,222,849,097 outstanding shares 18,000,000 Pre‐2011 RSUs
211 days 123,746,921 shares held by investors other than Zuckerberg 366 days 47,315,862 shares held by Mail.ru Group and DST Global Ltd.
Source: Amendment No. 8 to Facebook’s S‐1 Filings with the Securities & Exchanges
Commission (SEC) 89
89http://www.sec.gov/Archives/edgar/data/1326801/000119312512240111/d287954d424b4.htm#toc287954_19
112-052-1
U s a g e p
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38 67
99
35
CA SE 2 01 2‐ 14
‐C
Ex hi bi t 21
Sh ar es o n O ff er b y Ea rl y Fa ce bo
ok In ve st or s
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94 2,
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* Le ss th
an 1 p er ce nt
So ur ce : A
m en
dm en
t N o. 8 t o Fa ce bo
ok ’s S ‐1 F ili ng s w ith
th e Se cu ri tie
s & E xc ha ng es C om
m is si on
(S EC
)9 0
90 h tt p: // w w w .s ec .g ov /A rc hi ve s/ ed
ga r/ da ta /1 32
68 01
/0 00
11 93
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35 58
8/ d2
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4d s1 a. ht m #t oc 28
79 54
_1 5
112-052-1
U s a g e p
e r m
it te
d o
n ly
w it h in
t h e s e p
a r a m
e te
r s o
th e r w
is e c
o n ta
c t in
fo @
th e c a
s e
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n tr
e .o
r g
T a u g h t b y A
r if K
h u r s h e d , fr
o m
2 - N
o v - 2 0 2 0 t o 2
8 - F
e b - 2 0 2 1 . O
r d e r r
e f F
3 8
6 7
9 9
.
P u r c h a s e d f o r u
s e o
n t h e F
o u n d a ti o n s o
f F
in a n c e , a t T
h e U
n iv
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f M
a n c h e s te
r W
o r ld
w id
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d .
E du
ca tio
na l m
at er
ia l s
up pl
ie d
by T
he C
as e
C en
tr e
C op
yr ig
ht e
nc od
ed A
76 H
M -J
U J9
K -P
JM N
9I O
rd er
r ef
er en
ce F
38 67
99
36
CASE 2012‐14‐C
Exhibit 22 Performance of Facebook, Groupon and Zynga Post‐IPO
Source: Yahoo Finance
112-052-1
U s a g e p
e r m
it te
d o
n ly
w it h in
t h e s e p
a r a m
e te
r s o
th e r w
is e c
o n ta
c t in
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s e
c e
n tr
e .o
r g
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r if K
h u r s h e d , fr
o m
2 - N
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8 - F
e b - 2 0 2 1 . O
r d e r r
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3 8
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9 9
.
P u r c h a s e d f o r u
s e o
n t h e F
o u n d a ti o n s o
f F
in a n c e , a t T
h e U
n iv
e r s it y o
f M
a n c h e s te
r W
o r ld
w id
e L
im it e
d .
