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    Executive Summary: Facebook Ipo

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    Ankit Khandelwal

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    Executive Summary: Facebook Ipo

    Uploaded by

    Ankit Khandelwal
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    CFIN2_Assignment1

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    17 views3 pages

    Executive Summary: Facebook Ipo

    Uploaded by

    Ankit Khandelwal

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 3

    FACEBOOK IPO

    Executive summary
    This report is aimed to provide consulting and assistance to CXT in evaluating Facebook’s IPO and
    accordingly deciding to invest in it or not.

    A social networking platform, Facebook was started in 2004 by Mark Zuckerberg, initially attracting
    college students. Facebook’s growth was rapid in its initial years and soon it dominated the market.
    Facebook’s IPO decision in 2011 was a no-brainer with its exponential growth over the years. But it is
    important to consider the fact that Facebook didn’t pay dividends and that there might be a chance of
    paying too much for its stock. Hence a careful evaluation of Facebook’s returns is needed.

    Here, a discounted cash flow (DCF) analysis and market multiples approach can help make the right
    estimate of the value of Facebook. Not just quantitative, but also a qualitative analysis of the
    Facebook’s IPO – its purpose, future goals, the potential of the sector, competition landscape at the
    time etc. should be carried out before making the decision.

    Important Considerations and Analysis


    Facebook has ensured strong user engagement on its platform by introducing features such as posting
    messages publicly, sharing comments, uploading photos etc. The core value offered here for users was
    not just the engagement bit but also the user experience of having to use a simple and intuitive
    interface. This high level of user engagement ensured that Facebook could not only entice advertisers
    on its platform but also provide them a clear direction on how to deliver advertisements based on
    user’s preferences. So, to make money, Facebook mainly leverages advertising revenues. The
    balance of its revenues comes through its payments business - mostly the sale of virtual goods via
    Zynga. The following table shows its revenues 3 years prior to IPO:

    2009 2010 2011


    Advertising Revenues (% total revenue) 98% 95% 85%
    Payment business revenues (in million dollars) $13 million $106 million $557 million

    Facebook has quickly gained a competitive edge over its competitors owing to its robust business
    model and a large and satisfied user base. From 1 million monthly users in 2004, Facebook
    established its foothold in the industry and reached a remarkable 845 million monthly user base by
    2011. Leveraging technology, Facebook has access to great bit of user data which not only drives its
    revenues but also helps to make relevant update/changes to its platform to meet growing user needs.
    Another way Facebook has gained competitive advantage was through acquisitions (gained on new
    tech, talented resource pools).
    Facebook IPO’s stated purpose was to globally connect all internet users (~ 2 billion users). It also
    factored in the rise of online social networking around the world as well as increasing competition
    that came along with it. The decision was affirmed even more so because going for an IPO will enable
    Facebook to use public equity markets and motivate and enable its current shareholders to
    participate. Funds were important for Facebook and the proceeds, as already decided, would be used
    for working capital and other general corporate purposes.
    At this time (2011) though, the US economy has still been feeling the effects of a fragile, global
    economic environment. The IPO market was no exception. Though the S&P 500 index has grown
    21% in May 2012 from November 2011 but then it fell by 5% in the first half of May. This
    uncertainty and volatility in the market dynamics had led to sharp 70% decrease in global IPO
    activity (from quarter 1 value of $46.6 billion in 2011 to $14.3 billion in 2012).

    Also, the recent IPOs at this time (LinkedIn, Groupon, Zynga) hadn’t performed as per
    expectations with their total returns falling by the end of 1 st month after launch. The launch was
    welcomed for Groupon and LinkedIn on the first few days but eventually declined by the end of
    month. For Zynga, the IPO’s performance was dissatisfactory (with negative returns from 1 st day).
    The performance of these three IPOs is also depicted in Exhibit 1 towards the end of this report.
    Appendix
    Exhibit 1 : Recent Technology IPOs (2011)

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