Huge news hit the world of finance yesterday that will affect over 800 million users worldwide.
Facebook, founded in 2004 by then Harvard sophomore Mark Zuckerburg, has filed for an initial public offering (IPO) with the Securities and Exchange Commission.
In essence, this means that the Internet giant will be selling off ownership to any investor interested in buying it, so that its shares can be publicly traded on a stock exchange such as the New York Stock Exchange or the NASDAQ Stock Market.
Investor interest in the filing is so great that within minutes of the document being posted online, the Security and Exchange Commission’s website had crashed.
The offering is set to be backed by financial powerhouses Morgan Stanley and Goldman Sachs, and shares will be traded under the ticker name FB.
Facebook’s IPO will be larger than any other IPO from a technology company, and is estimated to raise over $5 billion for the company in a single day.
To put the $5 billion into context, that much money would equal every single person in the world giving Facebook about 70 cents each.
With this offering, the total value of Facebook is estimated to equal $75 billion to $100 billion. This will make Facebook more valuable than a long list of household names including Visa, The Walt Disney Co. and most likely McDonald’s Corp.
Great uncertainty looms behind the sale of Facebook shares rumored to take place early this spring.
First of all, the Facebook initial public offering is following numerous public offerings in 2011 of other social networking and Internet sites including: Zynga Inc., Pandora Music Inc., Groupon Inc., LinkedIn Corp. and the “Facebook of China,” Renren Inc.
These offerings have been largely unprofitable for the average investor, with the majority of them trading under the initial price that investors paid on the first day the stock was offered.
The problem with these next-generation companies is not that they are failing, have bad ideas or that they run poorly. In fact, the opposite is actually true.
The problem lies in the fact that they do not generate the same amount of sales that a normal company would, yet investors are willing to pay extremely high prices for the stock. The same problem exists for Facebook.
The social networking era has come to be defined by Facebook, which boasts a usage rate of one in 10 people worldwide. However, Facebook provides a free service to its users, with almost all of its revenues coming from advertisements.
So what does the offering mean for the average user?
As a private company, Facebook was able to grow through innovation and taking risks with less regard to the financial impact of its decisions.
As a public company, it will be responsible for providing maximum returns to shareholders. This could potentially lead to more aggressive advertising or, however unlikely, a subscription fee.
It seems that Zuckerburg himself is even reluctant to take the company public, worrying that it could change the dynamic of the company as a whole. He does not have much room to complain, however.
He will be worth a cool $25 billion after the deal goes through. Not too shabby for a 27-year-old college dropout.
Brian Gibbons is a sophomore studying finance and business economics. Want to hear about something in the world of finance? Send finance questions or column ideas to him at bg306009@ohiou.edu
