Commercial awareness: think like a professional about... Facebook's IPO

Our banker, lawyer, accountant and consultant take a second look at the world's favourite social networking site – and its future plans

After months of speculation and false alarms, leading social networking site Facebook is expected to confirm its intention to proceed with an initial public offering (IPO) - that is, to offer its shares for sale publicly. It has been reported that the social networking site will file details of its proposed listing with the Securities and Exchange Commission (SEC) early in February, with the first public trading in Facebook shares due to occur in May.

Facebook was created eight years ago by a group of Harvard university students, including current chief executive, Mark Zuckerberg. Since then, the site has grown rapidly, and now boasts around 800 million users. Its shares are already traded to a limited extent on private secondary markets and the company currently has over 500 shareholders, making it obliged to report to the SEC, which has been seen as a stepping stone for the company towards a full listing. Private trading in Facebook shares has been halted temporarily by Facebook's lawyers in recent weeks, which has been seen by many as a firm indication that an announcement of a full listing is imminent.

Facebook is expected to choose to list on the New York Stock Exchange, rather than the technology-heavy but less prestigious NASDAQ. Some commentators have suggested that the company's IPO could see the company being valued by the market at $100 billion (£63.6 billion).

However, the current private trading in Facebook shares suggests that the market values Facebook at closer to the $80 billion mark. And its worth noting that 2011 saw a number of disappointing technology IPOs, where the market value realised failed to live up to initial hype, for example, that of "Facebook for business" LinkedIn, discount site Groupon, and Zynga, the company which creates many of Facebook's games, including the popular FarmVille. Does the same fate await for Facebook?


  • Going round in circles: It might be a while before Facebook can put "listed on NYSE today" as its status update, but rest assured that a lot of lawyers will be doing a lot of work right now to get the company ready for its IPO, a huge step for a company. Facebook's US attorneys will be heavily involved in the drafting of Facebook's offering prospectus, the document that it must present to the Securities and Exchange Commission in order to be allowed to list.
  • Loving that dead chicken: The EU is proposing tough new privacy legislation, which is likely to have an impact on Facebook's business. European legislators are suggesting that Facebook and other social networking sites must let users know exactly what data they hold on them and what it's used for, and should also let users delete data permanently if they choose to. If these proposals become law, they could have an impact on Facebook's advertising revenue, as advertisers like to have as much information as possible about the people they're reaching. On the other hand, perhaps Mr Zuckerberg will welcome tighter privacy controls on the site after some personal snaps of him and his girlfriend were accidentally made public at the end of last year.


  • All grown up: Once it finally lists on NYSE, Facebook will have to start behaving in a different way. Being a public company means subjecting your financial statements to the scrutiny of your investors every quarter. Investors in a solid and high value public company (which Facebook will be) tend to be conservative folk like pension fund managers, who'll want to see evidence of steady growth month on month. Facebook won't be able to carry on acting like a start-up, and may find its freedom of action and ability to take risks constrained.
  • Cashing up: Whether Facebook makes $100 billion or nearer $50 billion on its IPO, you don't need to be an accountant to realise that it'll have a lot of money very quickly when it finally cashes in its market value. What will the company do with it all? It doesn't manufacture anything or provide a physical service, so its running costs are low. Well, its investors probably think it's time that they saw a serious slice of the company's value hit their bank accounts. And beyond that, I wouldn't be surprised if an acquisition or two is on the cards.


  • Time for a change: I'm wondering if we're seeing a backlash against the Facebook brand, which does not bode well for its prospects following an IPO. There's been some complaints about its new Timeline format, and I've also noted the rise of some smaller and more exclusive alternative social networking sites, like A Small World for travellers, Ndoorse for the business-minded and What I Wore Today for fashionistas.
  • Big picture: But I think that Facebook, like Google, still has a powerful vision that will keep driving it forward. Google's much trumpeted mission statement "Don't be evil" has spurred them to take a relatively principled stance in China on the issue of freedom of information - since March 2010 it no longer alters the way its site works to fit with Chinese internet censorship policies. And in terms of Facebook's vision, I've heard that multiple copies of Magritte painting "The Man in the Overcoat" at the company's Palp Alto headquarters serve to remind staff that they're still striving to make it standard to access the internet's vast amounts of information through social connections rather than faceless word searches.


  • Hundreds and thousands: $100 billion is one big number. Is Facebook really worth that much? There are certainly lingering doubts in the market about the company which, despite all its success, will always be in the notoriously volatile technology sector. I'd say it needs to show some serious growth to justify this figure. It's still winning new users - 100 million of them signed up between May and September last year - but at a slowing rate and I'm worried it's reaching a plateau. I've got my eye on user-generated video sites instead - Google-owned YouTube saw a 45 per cent increase in traffic last year. I guess it shows that people might like stalking their friends and acquaintances, but they like films of people they don't know doing stupid things even more.
  • Old favourites: Facebook has gone for the top dogs when picking investment banks to guide it through the IPO process. I hear that the lead underwriter role will go to Morgan Stanley, with Goldman Sachs set to get a prominent place on the tombstone too. But on such a big deal there'll be plenty of work to go round so we'll see a lot of other Wall Street banks getting involved.