The social network goes public

Facebook set the business world abuzz when it initiated the process towards announcing an IPO. Bhama Devi Ravi explains

Published: 21st February 2012 12:08 AM  |   Last Updated: 16th May 2012 06:00 PM   |  A+A-

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Mark Zuckerberg (Image courtesy Wikimedia Commons).

On February 1, Mark Zuckerberg’s Facebook filed the prospectus for an Initial Public Offering (IPO). The allotment of shares to the public is likely to be announced soon, and is expected to fetch $5 billion according to conservative estimates. The IPO is likely to be oversubscribed many times over. Not bad for a social network that doesn’t offer any tangible products. But that may change.

Facebook has become the social networking website where you will find anyone from the age of seven to 80-plus actively talking about their lives and interests, uploading photos or updating status messages. To put it simply, Facebook has simply become the most popular place to hang out online.

The Big IPO Buzz

Now the company that changed our mindset on socialising and baring our thoughts on a public forum has come up with an offer that has created quite a buzz.

The offer is a slice of friendship for a fee. On February 1, Facebook filed the preliminary prospectus for its much-awaited IPO. The company expects to raise a mind-boggling $5 billion through this exercise. This for a website originated when its founder and chief executive Mark Zuckerberg mischievously posted some photographs of his fellow students at Harvard University  and invited comments on who was good looking and who was not.

Social Networking

That was in 2004, when Facebook was a start-up. Since then this wunderkind has built up a virtual ‘civilisation’, where people have bared their souls like never before. The network boasts of 845 million users. Only China and India have a larger population. And the Facebook ‘population’ is expected to keep growing, especially in countries such as Brazil and India, where providing Internet connectivity in rural areas is still an ongoing process.

Site trackers and researchers such as comScore.com have found that one out of every seven minutes spent on the Internet is spent on Facebook.

Entry is free, and easy. Its members have forged friendships, posted film reviews, recommended songs, tracked political and social events — such as last year’s Anna Hazare movement and the Arab Spring uprising in the Middle East. People, young and old, have also used Facebook to play all kinds of games on offer — again for free.

Historians would say that this website, in many ways, both reflected and shaped cultural and social history. Unlike websites such as Google, which as a search engine enables you to find answers to specific queries (Eg the history of Macedonia), Facebook started as a place for chit chat. It continues to retain that tone and flavour.

What is an IPO?

An IPO is a process by which a private company offers a share in its company to the common man, for the first time ever, at a price. People invest in reputed companies, assured of a profit at some point — either in the near future or in the long run.

Traditionally, companies opt for an IPO if they want to expand their business, and the money generated by offering shares in the company is ploughed back into it to take its expansion forward. On occasion, companies opt for an IPO as a an exit strategy for the original owners to encash their original investment and move out.

In the case of Facebook, its 27-year-old founder Zuckerberg always wanted to keep it within the ‘family’, by keeping the shares with a handful of friends, colleagues and family members. He wanted it to be a social utility tool, not a business or educational primer.

When the shares are held by a closed group, without tapping the public for investment, such shares are not generally available to outsiders, except through private trading (buying and selling) on secondary markets. But the company had to opt for an IPO after it became clear in 2010 that by 2011, the networking website’s shareholder base would cross 500. Five hundred shareholders is the threshold level — once this figure is crossed, the company’s performance, specially its financials, have to be made public.

When you have to declare your profit and loss to the public, most companies see the wisdom of generating more funds by offering an IPO, and then embarking upon expansion plans.

How IPOs Work

After deciding to go public with its IPO offering, a company decides upon the number of shares to be given away, and the share price of each. After this, a the company identifies an underwriter to oversee the entire process. Usually IPOs of reputed companies or giants are oversubscribed many times over. When that happens, subscribers are given only partial allotments.

If someone has opted for 10 shares, he or she may be given only five  and the money for the other five is returned to the subscriber.

Shareholders can sit in on shareholders meetings periodically, and track the stock’s (share) performance on the stock market as well.

The company, in this case Facebook, will be listed on the stock markets. Zuckerberg owns a 28.4 per cent share of Facebook, and has control of voting rights.

Why a Facebook IPO is Desirable

Usually if one invests in a profitable company the shares of that company rise after an IPO. Also, it is assumed that the IPO price will be far below the company’s prevailing market value. Those lucky enough to get shares allotted can then sell such shares for a profit at the right time.

Last year Facebook made US $1 billion as net profit (that is, profit after deducting operational expenses like salaries). Clearly the company is a profitable one, with profits going up last year by 65 per cent over the previous year. Anyone wanting to put his or her money into a company, will want to ride that crest of profitability.

Working on a platform quite different from Google or Apple or Amazon, how does Facebook make a profit? Close to 85 per cent of its income is generated from advertisements, and the rest from social gaming and other fees.

By far the biggest asset that Facebook enjoys today is its huge user database. Although Zuckerberg has repeatedly stressed that privacy will be protected, the huge database will come in very handy, if Facebook wants to target users as customers. But that may not be as easy as it seems, with governments across the world considering more online censorship.

Capitalising on its Strengths

However, it is Facebook’s future plans which will engage pundits, analysts and shareholders. How will the company increase its profits, so that the common man investing in it can also benefit? Some concerns would be whether the company will recruit more staff — currently it has 3,200 employees only. Will there be enough innovation to justify such recruitment or, as is likely, will the company channel some the of the funds generated through the IPO into Research & Development?

Can a company that claims to be ‘social by design’ also deliver profits and keep ahead of competition? Experts believe that Google will make the going tough for Facebook, and battle lines are already drawn. After all, Google’s Orkut, a networking site, was edged out by Facebook.

Pundits say Facebook will likely tap the mobile phone segment as well. It is estimated that 425 million people are using their mobile phones to log onto Facebook. But the field is already crowded — with Apple sitting pretty.

Can Facebook remain a social vehicle and also constantly upgrade itself  and stay competitive, for its users and investors alike? Only then will all the hype and excitement enjoyed by this pioneering virtual global social club be justified, as the company prepares for the IPO.

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