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Inc.
The
Initial
Public
Offering
Niranjan
Zende
I.
Introduction
Facebook is a social networking website that allows you to connect and share
memories with your family and friends online. Originally designed for college
students, Facebook was created in 2004 by Mark Zuckerberg while he was
enrolled at Harvard University. By 2006, anyone over the age of 13 with a
valid email address could join Facebook. Although Facebook did face
competition in its early stages from incumbents within the industry on a
national as well as international level, it kept growing rapidly.
Based on the data provided and analysis done, I would like to bring to light
some key concerns and suggest some recommendations for an Investment in
the IPO.
II.
Facebook had quite a few competitive advantages; large user base, Business
model built around data, ease and simplicity of use, mobile app for user
engagement and an aggressive stance towards an inorganic growth strategy.
III.
At the time of the Facebook IPO, the US economy was still recovering from
the 2007-09 economic crises and the global economy including Europe and
developing economies were in crisis or were faltering.
Also, Exhibit 2, depicts the recent technology IPOs in the US markets whose
performance was being analyzed by Mr. McNeils Team, It is very evident
that the stock price of the companies in the industry had witnessed a pop on
the first day of being traded. Companies such as Groupon and LinkedIn sold
at a price above their initial price range. It was the overvalued intrinsic value
of the stock that made the prices fall gradually. As far as the IPO for Zynga
goes, even though their IPO price was within their price range, its
performance wasnt sustaining.
IV.
Today, Facebook is the world's largest social network, with more than 1 billion
users worldwide. The goal stated in the 2011 Facebook prospectus was that
Facebook intended to connect all the 2 billion global Internet users.
In 2011, Facebook Inc. made the decision of going public after noticing the
increasing popularity and presence of social media companies. Facebook
decided to go for the IPO as it would allow existing shareholders and
investors to participate in the public markets and also allow Facebook to make
use of the public equity markets for future fundraising. It was pre-determined
that the proceeds from the IPO would be used for working capital and general
corporate purposes.
V.
In the case is given a Discounted Cash Flow (DCF) approach to evaluating the
intrinsic value of the company and the shares. Exhibit 3 shows the analysis of
the DCF keeping all the baseline assumptions in line with the analysis
performed by Prof. Aswath Damodaran. The only thing that has been taken
into account is the additional number of shares, which may be floated into the
public market post-IPO. This has led me to value the share at $32.47. This
price is below the price talk of $34 to $38 per share and may indicate the stock
to be overvalued if all the stocks held by the stakeholders may be traded in
the open market in the short to medium term.
Another method by which we may be able to determine the value of the stock
by using Exhibit 4, which is given below, the extract from the consolidated
balance sheet gives us the pro forma values for the pro forma for stock
options and pro forma for stock options+IPO. The difference between these 2
figures i.e. $11,998million and $5597million would give us $6,401million.
Therefore, Value of Issue/No. of shares issued = 6,401/180 = $35.56 per
share. This price is between the price range of the price talk of $34 to $38
which was updated by the underwriters as this estimation would value the
stock at $35.56 .
VI.
Key Concerns
User data security and privacy Facebook has taken a lot of heat in the
recent years and even years preceding the IPO in regard to the social
values of the social media behemoth. Underage users and Social
experiments on users are only some of the proven accusations on the
company and such incidents would only erode shareholder value.
VII.
Recommendation
VIII. Exhibits
Exhibit 1
Recent Technology IPOs
Company
Ticker
IPO date
IPO price
Gross Proceeds
1st Month
Total Return
LNKD
19-May-11
$45.00
$352.8 million
109.4%
91.9%
Groupon
GRPN
3-Nov-11
$20.00
$621 million
43.0%
21.3%
45.6%
-5.3%
Zynga
ZYNG
16-Dec-11
$10.00
$1 billion
-5.0%
-6.1%
-11.3%
Exhibit 2
Market Statistics on US IPOs
Quarter
Number of deals
Q1'04
339
Q2'04
385
Q3'04
339
Q4'04
457
Q1'05
327
Q2'05
409
Q3'05
364
Q4'05
452
Q1'06
Q2'06
%chg QoQ.
Quarter
%chg QoQ.
Q1'04
29
14%
Q2'04
33
14%
-12%
Q3'04
29
-12%
35%
Q4'04
39
34%
-28%
Q1'05
29
-26%
25%
Q2'05
39
34%
-11%
Q3'05
38
-3%
24%
Q4'05
74
95%
360
-20%
Q1'06
39
-47%
473
31%
Q2'06
66
69%
Q3'06
355
-25%
Q3'06
49
-26%
Q4'06
608
71%
Q4'06
112
129%
Q1'07
395
-35%
Q1'07
37
-67%
Q2'07
574
45%
Q2'07
95
157%
Q3'07
442
-23%
Q3'07
59
-38%
Q4'07
603
36%
Q4'07
105
78%
Q1'08
253
-58%
Q1'08
41
-61%
Q2'08
274
8%
Q2'08
39
-5%
Q3'08
164
-40%
Q3'08
13
-67%
Q4'08
78
-52%
Q4'08
2.0
-85%
Q1'09
52
-33%
Q1'09
1.4
-30%
Q2'09
82
58%
Q2'09
10
614%
Q3'09
146
78%
Q3'09
34
240%
Q4'09
297
103%
Q4'09
67
97%
Q1'10
293
-1%
Q1'10
54
-19%
Q2'10
314
7%
Q2'10
47
-13%
Q3'10
302
-4%
Q3'10
53
13%
Q4'10
484
60%
Q4'10
132
149%
Q1'11
296
-39%
Q1'11
47
-64%
Q2'11
383
29%
Q2'11
66
40%
Q3'11
291
-24%
Q3'11
29
-56%
Q4'11
255
-12%
Q4'11
29
0%
Q1'12
157
-38%
Q1'12
14
-52%
Exhibit 4
Discounted Cash Flow Analysis
DCF
2011
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
Termina
l
Base
year
10
year
7.6%
7.6%
7.6%
7.6%
7.6%
0.0%
Assumptions:
Revenue growth rate
40.0%
40.0%
40.0%
40.0%
40.0%
32.4%
24.8%
17.2%
9.6%
2.0%
2.0%
45.7%
44.6%
43.5%
42.5%
41.4%
40.3%
39.3%
38.2%
37.1%
36.1%
35.0%
35.0%
Tax rate
40.0%
40.0%
40.0%
40.0%
40.0%
40.0%
39.0%
38.0%
37.0%
36.0%
35.0%
35.0%
Increase in CAPEX + WC as % of
sales
67%
67%
67%
67%
67%
67%
67%
67%
67%
67%
100%
Cost of capital
11.1%
11.1%
11.1%
11.1%
11.1%
10.5%
9.8%
9.2%
8.6%
8.0%
8.0%
67%
67%
67%
67%
67%
67%
67%
67%
67%
67%
100%
3,711
5,195
7,274
10,18
3
14,256
19,959
26,425
32,979
38,65
1
42,36
2
43,20
9
44,073
EBIT
1,695
2,318
3,167
4,325
5,903
8,051
10,377
12,599
14,35
3
15,27
9
15,12
3
15,426
EBIT(1-tax)
1,017
1,391
1,900
2,595
3,542
4,830
6,330
7,811
9,042
9,778
9,830
10,027
Increase in CAPEX + WC
995
1,392
1,949
2,729
3,821
4,333
4,391
3,800
2,486
568
864
FCFF
396
508
646
813
1,010
1,997
3,420
5,242
7,292
9,262
9,162
Terminal value
152,707
Present value:
Cumulative discount factor
0.900
4
0.8107
0.729
9
0.6572
0.5917
0.5357
0.4877
0.446
5
0.411
1
0.380
6
0.3806
PV of FCFF and TV
357
412
471
534
598
1,070
1,668
2,341
2,998
3,526
58,128
Equity
Debt
Preferre
d
Capital
Value of firm
72,101.2
- Debt
1,587.0
+ Excess Cash
2,000.0
Value of equity
72,514.2
3,088.5
WACC
69,425.7
Market values
$81,247.8
$1,587.0
2,138.1
Weights in WACC
98.08%
1.92%
0.00%
100.0%
$32.47
Cost of
Component
11.24%
2.37%
7.14%
11.07%
Price talk
$38.00
Price as % of value
117%
$$82,834.8
Exhibit 4
Extract from Consolidated Balance Sheets
Consolidated Balance Sheets:
$3,910
$3,910
Working capital
3,655
3,980
10,381
1,855
1,855
1,855
Total assets
6,859
7,184
13,585
Total liabilities
1,587
1,587
1,587
5,272
5,597
11,998
As of March
31, 2012
IX.
References
1. Intrinsic Value Definition | Investopedia. (2003, November 23).
Retrieved July 3, 2015, from
http://www.investopedia.com/terms/i/intrinsicvalue.asp
Mark, K., Compeau, D., Dunbar, C., & King, M. (2014).
Facebook, Inc: The Initial Public Offer (A). In (W12453 ed.). Ivey
Publishing.