Intoday’s age, many companies in various sectors such as high-tech, real-estate,healthcare, financial services, etc. have start-up companies.
Remaining privatehas its benefits, but expanding your brand is mainly where the nucleus is. Withthe amount of attention generated by a company’s success, they expand theirbrand by in simple terms “going public (if you’ve seen the move “The Wolf ofWall Street” you know what I’m talking about). By doing so, this is called anIPO. IPO stands for initial public offering. When a company becomes public, the company begins to initiallyoffers shares of stocks to the public and the company is listed on an exchange.Companies tend to go public for various reasons, which will be statedfurthermore in this paper. This paper tends to provide a thorough analysis ofan example of a company that went public known as “Facebook” which did so in2012.
For a company to go public, there is a step by step process on how aprivate company fuses itself into the stock market. Once a company “goes public”,it is registered with the SEC. SEC stands for Securities Exchange and Commission. The process starts byfiling a form known as the S-1. The SEC reviews the filing and sends back verydetailed comments. The company then files an amendment reflecting thesecomments. The SEC comments again.
This process repeats until the SEC says ithas no further comments. The company then files/prints a “redherring” or Preliminary Prospectus and begins the tour. This usually lasts2 weeks and the offering is priced on the last night of the tour and begins tradingthe next day. In total, the process of becoming a public company takes fromabout 2 weeks minimum to three months maximum, depending on the company and itsadvisors. In most cases, a company plans to become public a year before thedeclared IPO, in preparation for the legal fees. The SEC reviews theregistration statement to make sure that the company has disclosed all theinformation necessary for investors to decide whether to purchase the stock.Once the company has satisfied the SEC’s disclosure requirements, the SECapproves the stock for sale to the public.
The company prepares the finalregistration statement and final prospectus containing all the details of theIPO, including the number of shares offered and the offer price. Details of theproposed offering are disclosed to potential purchasers in the form of alengthy document known as a “prospectus.” Once the IPO process is complete, thecompany’s shares trade publicly on an exchange. The lead underwriter usuallymakes a market in the stock and assigns an analyst to cover it. By doing so,the underwriter increases the liquidity of the stock in the secondary market.
BasicTheory/Principles:As mentionedearlier, an IPO is an initial public offering when a company plans to go publicon the stock market. Prior to a company going public, the company is private,which consists of relatively a small number of shareholders made up of earlyinvestors, (which includes the founders, family, and friends) as well as angelinvestors or even venture capitalists. In IPOS there are two types of offerings,known as Primary and Secondary. A primaryoffering are the shares that are sold in the IPO may either be new sharesthat raise new capital.
This is what happens when a company offers the firstshares of stock to the public. A secondaryoffering or existing shares that are sold by current shareholders (as partof their exit strategy). Some companies, for example Facebook had a secondaryoffering and made a huge comeback. The lead underwriter is the primary bankingfirm responsible for managing the deal. The lead underwriter provides most ofthe advice and arranges for a group of other underwriters, called thesyndicate, to help market and sell the issue.
Additionally, funding rounds area type of funding round used for venture capital financing, by which startupcompanies obtain investment, generally from venture capitalists and otherinstitutional investors.Formulas:Many investmentfirms and other companies use several formulas to determine whether to invest ina certain public company. NPV stands for Net Present Value. We use this tocompare the costs and benefits of a project in terms of a common unit known asdollars. Earnings per share is a firm’s net income divided by the total numberof shares outstanding. As mentioned earlier, NPV stands for Net Present Value.NPV=PV.
The formula for NPV is NPV= PV(Benefits)-PV(Costs). By using positivecash flows to present benefits and negative cash flows to represent costs, theformula gets broken down to NPV=PV (All project cash flows). Another keyformula used for company’s that plan to go public is: Post-money Valuation =Pre-money Valuation + Amount Invested. Hedge funds tend to use these formulasto create reports and to make key decisions on whether to invest in a certaincompany. A Hedge fund is when a limited partnership of investors which use highrisk methods, such as investing with borrowed money, in hopes of getting largecapital gains in return. This formula can be applied to IPO’s and specificallyto Facebook.
Data:Facebook is a verypopular social networking website and went public on Friday May 18th,2012. Facebook was the biggest IPO in history on the stock market. Facebookracked in $16 billion USD. Before Facebook had gone public, in 2007, Microsoft boughta 1.6% stake in the company, worth $240 million USD. When the company wentpublic, the stake had grown to over $1 billion USD, quadrupling its value(4.
17x to be exact). According to Facebook’s SEC Statement: The trading priceof our Class A common stock has been, and is likely to continue to be,volatile. Since shares of our Class A common stock were sold in our IPO in May2012 at a price of $38.00 per share, our stock price has ranged from $17.55(September 2012) to $133.50 through December 31, 2016. Facebook’s price tag pershare increased $115.
95 over 4 years, rising $28.9875 per year. After Facebookwent public, it’s P/E ratio was at 85% despite Financial results for Facebook 2016 wereimpressive in comparison to 2015. According to Facebook’s Management Discussionof Financial Condition andResults of Operations, revenuehad increased from $27.64 billion, up 54% year-over-year, and ad revenue was$26.89 billion, up 57% year-over-year. Net income was $10.22 billion withdiluted earnings per share of $3.
49. According to CrunchBase, valuation at IPOfor Facebook was at $104 billion USD. According to their SEC report, “in 2016,we continued to make progress on our three main revenue growth priorities: (i)continuing to capitalize on the shift to mobile, (ii) growing the number ofmarketers using our ad products, and (iii) making our ads more relevant andeffective through continued adoption of newer ad formats and tools for marketers.
“Facebook has a current share price worth over $175 and this number continues togrow. Facebook is listedon the table to the right in the category as the 3rd largest U.S IPO.Additionally, Facebook is the 6th world’s largest IPO. MorganStanley (lead underwriter) had made a deal worth $16,007 Million USD. Here is a revenue/eps summary for thefiscal years from 2015-2017. Facebook’s Revenue and EPS had increased over thefiscal year as well as monthly. A lot of these factors are due to Facebook’spopularity and high number of users, as well as Facebook’s increasing number ofacquisitions.
Facebooks two popular acquisitions were mainly WhatsApp andInstagram as they company bought out their competition worth ($1 billion and$22 billion respectively). Recently, Facebook has expressed interest in buyingout Snapchat, however the CEO of Snapchat Evan Spiel turned down the $3 billionoffer. Facebook still expresses this interest to this very day and has mademore offers to Snapchat. Cash used in investing activities was$11.
74 billion during 2016, mostly due to $7.19 billion for net purchases of marketablesecurities and $4.49 billion for capital expenditures as we continued to investin data centers, servers, office buildings, and network infrastructure. Theincrease in cash used in investing activities during 2016 compared to 2015 wasmostly due to increases in capital expenditures and net purchases of marketablesecuritiesAccording to the chart above, cash flowshave increased from 2014-2016 showing gains across the board. As you can see above, Facebook hasdemonstrated increased revenue all over the world, signifying that it has madetremendous gains yearly. Facebookdaily active users has continued to increase yearly. Facebook is a strong company,financially secure from it’s IPO in 2012. Net cash has increased in operating,investing, and financing, although investing and financing has shown a net lossas listed above.
Analysis: Facebook has shown strong growthfrom it’s IPO in 2012. Revenue has increased, diluted EPS has increased as well.In addition, the number of acquisitions made by the company has increased itsrevenue opening the door from more acquisitions to follow suit. According to CrunchBase (whichprovides a business information platform that pairs powerful tools andapplications to stay competitive and successful) Facebook has made 71acquisitions. Two key acquisitions being WhatsApp and Instagram, as mentionedearlier.
Facebook’s Earnings Per Share has increased drastically from 2015 to2016, increasing revenue by $10,000 Million USD and increasing the EPS by$2.20. Facebook made a huge comeback in the end of 2013 when Facebook announcedit would be doing a secondary offering consisting of 70 million shares, morethan 40 million off them being CEO Mark Zuckerberg’s. Several reasons that thishad occurred was due to the company drowning in lawsuits, as it happened a daybefore being in the S 500, and due to Facebook needs to generate capitalto use it for corporate and general purposes.
Pros& Cons: Thereare many advantages of a company going public. The two main advantages for aprivate company going public are greater liquidity and better access tocapital. When a company goes public they give a chance to their private equityinvestors the ability to diversity.
This gives companies a chance to increasetheir equity. In addition, public companies usually have access to much largeramounts of capital through the public markets, both in the initial publicoffering and in subsequent offerings. Facebook has a total funding amount of upto $2,335, Another advantage of going public is employee stock options,bonuses, and other performance incentives that attract the best minds and keepkey personnel in place. Finally, the ability to raise large amounts of growthcapital quickly. As mentioned earlier, funding rounds help companies likeFacebook and generate capital quickly in a short period of time.
Similarly,millions of dollars of equity financing can also be raised overnight—money thatcan be used to fund growth initiatives like launching new products and markets,hiring more employees, investing in research and development, and fundingcapital expenditures. Facebook has successfully generated capital and has seena huge benefit in going public. Facebook has increased it’s daily active usersas increased as mentioned earlier. Facebook’s secondary offering took off whichmade it very successful.
Here are the stats of Facebook’s secondary offering: 1)Consisted of 70 Million shares 2)Announced in December 2013 3)Worth $4 Billion 4)Offering priced at $55.05 per share 5)CEO Mark Zuckerberg sold 41.4M of his Class A Common Stock Reasonsfor Secondary Offering: 1)Lawsuits: S-3 reported an ongoing legalcase around securities violations during its IPO last year and “seekingunspecified damages.” It further notes that “We believe these lawsuits arewithout merit, and we intend to continue to vigorously defend them,” but alsothat “Such lawsuits or inquiries could subject us to substantial costs, divertresources and the attention of management from our business, and adverselyaffect our business.
” 2)Inclusion into the S&P 500. Releasing of more shares. 3)Facebook noted that it will be used for working capital and general corporatepurposes: “Ourprincipal purpose for selling shares in this offering is to obtain additionalcapital. We intend to use the net proceeds to us from this offering for workingcapital and other general corporate purposes; however, we do not currently haveany specific uses of the net proceeds planned. Additionally, we may use a portionof the proceeds to us for acquisitions of complementary businesses,technologies, or other assets.” Today,Facebook’s share price is at $175.On the downside,going public doesn’t seem to be a good idea.
One of them being is undertakingan IPO. Some IPOs can be undervalued, and this is what had happened toFacebook. Facebook’s original share price was set to be between $28-35, howeverFacebook’s initial share price was at $38. In September 2012, the company hadseen a significant drop in their price tag of shares to $17.55. When investorsdiversify their holdings, the equity holders of the corporation become more widelydispersed.
Also, the lack of ownership undermines investors ability to monitorthe company’s management which leads to investors discounting the price theyare willing to pay. Additionally, another disadvantage of a company goingpublic is high-profile corporate scandals. Scandals such as Enron, Tyco Ltd., BearnStearns Companies Inc., Ponzi Scheme in 2008, Adelphia Communications Corp.,Martha Stewart Scandal, etc. This led to tougher regulations not only by theSEC (Securities Exchange Commissions), but to the security exchanges includingthe New York Stock Exchange and NASDAQ, as well as on the federal level throughCongress (through the Sarbanes-Oxley act of 2002).
Compliance with these newstandards is time consuming and has a high price tag for public companies. Thiscan be seen with Facebook. Facebook has been subject to serious litigation,which is what it still faces to this very day. For example, “Beginning on May22, 2012, multiple putative class actions, derivative actions, and individualactions were filed in state and federal courts in the United States and inother jurisdictions against us, our directors, and/or certain of our officersalleging violation of securities laws or breach of fiduciary duties inconnection with our initial public offering (IPO) and seeking unspecifieddamages. We believe these lawsuits are without merit, and we intend to continueto vigorously defend them.
” This just goes to show you how having your companygo public can be a headache for the management level of such companies. “Inaddition, we are currently the subject of stockholder class action suits inconnection with our IPO and with our intention to create a new class of capitalstock (Class C capital stock) and to declare and pay a dividend of two sharesof Class C capital stock for each outstanding share of Class A and Class Bcommon stock (the Reclassification). We believe these lawsuits are withoutmerit and are vigorously defending these lawsuits. On December 11, 2015, thecourt granted plaintiffs’ motion for class certification in the consolidatedsecurities action. In addition, the events surrounding our IPO became thesubject of various state and federal government inquiries. Following ourannouncement of the Reclassification, beginning on April 29, 2016, multiplepurported class action lawsuits were filed on behalf of our stockholders in theDelaware Court of Chancery against us, certain of our board of directors, andMark Zuckerberg. The lawsuits have been consolidated under the caption In reFacebook, Inc. Class C Reclassification Litig.
, C.A. No. 12286-VCL, and theconsolidated complaint generally alleges that the defendants breached theirfiduciary duties in connection with the Reclassification.” Finally, anotherdownside of a company declaring its IPO is thereal possibility of an unsuccessful one in which investors simply don’tpurchase shares when they evaluate risk versus reward. Meaning, some investorswill choose not to invest in a company resulting in a net loss of the company’srevenues. Another major downside of accompany going public is the increasedrisk of legal exposure.
A company and its directors/officers will be subject topotential liability under the federal securities laws for materialmisstatements or omissions in its SEC filings and other public disclosures.” Facebooks IPO hada ton of downside to it. Lawyers had blamed Facebooks horrible start to aglitch on NASDAQ (Within twelve trading days of Facebook’s IPO, the share pricehad decreased to $25.87 from $38, (a 32%) drop which worried many investors.Many investors had invested first in the company and then had asked questions,instead of asking questions then investing in the company. Facebook’s Road Showwas held on May 3rd, 2012.
Morgan Stanley (the underwriter)discloses the share price from $28 to $35. As mentioned before, many IPOS areunderpriced and this is what had happened to Facebook. Finally, another IPOissue is that there was an estimated $630 million-dollar loss according toBloomberg. Even though Facebook made a huge comeback, they still sufferedtremendously in the beginning. Conclusion: Acompany going public has its downfalls and its upsides. Some companies shouldgo public, like Facebook. Some companies should not go public/ never go publicdue to lack of resources.
After thisanalysis of Facebook, it is safe to say that Facebook is a very successful IPO,even though as mentioned earlier, it had a huge downfall in September 2012,when its shares price had dropped to almost 20$ its original share price at$38. Nonetheless, Facebook has demonstrated strong growth over the years,increasing the net worth of the company, as well as making over 71 acquisitions(such as WhatsApp and Instagram as mentioned earlier) in some minor and majorcompanies. Additionally, Facebook has demonstrated growth in the quarterlyreports yearly, each showing upward trends and making tremendous financialgains.
Hedge funds use various templates to determine whether to invest in acertain company. Hedge funds assess the company’s products competitor’sacquisitions and do an analytical assessment. This assessment is importantbecause hedge funds analyze common stock as well as financials. Financials areimportant to determine and see who invested in this company previously. Othersyndicates that contributed to the IPO were Morgan Stanley, JPM, BoA, Barclays,Deutsche Bank, RBC, Wells Fargo Citi, and Goldman. It’s safe to say that notall companies should go public on the stock market. Some companies shouldremain private and wait to get the appropriate investors.
Facebook has receivedmany offers from investors however CEO Mark Zuckerberg did the right thing bywaiting for the company to go public. Facebook is a great company with over abillion users and is guaranteed success in the coming years. To find out moreinformation about Facebook, you can watch the movie “The Social Network” whichwas released in 2010 and talked about Facebook’s upbringing.