Mark Riley says Facebook’s IPO could be just the boost the technology industry needs.
By many accounts, Facebook has no need to seek public money on the open market. It has reportedly already tucked $450 million from a Goldman Sachs private round under its belt in January 2011 and is well on track with its forecast revenues of $4.27 billion in 2011.
With Goldman on speed dial, Mark Zuckerberg can raise any amount of credit he needs and avoid the unpleasant hassle of results calls and analyst grillings. He will not like dancing to the beat of the quarterly drum.
He also likes being a chief executive who answers to an intimate board. He likes making longer term decisions. Post IPO, he would have to be far more outward looking and less able to focus on his beloved technology and product development.
Meanwhile, many of his senior executives have quietly been cashing in their options on a secluded secondary market, releasing internal pressure for an IPO exit.
So why the rumours of dry rehearsals of quarterly results calls in December? It may be that the SEC is finding its bite and insisting on public disclosure of financial results, once Facebook has more than 500 investors. Of course Facebook could be practicing for this scenario, while remaining a private entity.
It could be that Goldman Sachs has a vested interest in pushing for an IPO, being in pole position to advise on such an event. But Goldman Sachs currently has a privileged position as Facebook’s sole cash raising vehicle.
The more likely reason is to build an acquisition war chest. So far, Facebook has relied on its stock as a liquid and highly-valued currency to acquire companies, often just for the talent. However, more recent Google moves into the social space may have spooked Facebook into wanting a similar reserve in cash, so as not to be at a fiscal disadvantage.
Facebook might be challenging Google in terms of day-to-day traffic, but it is still a minnow by any financial metric.
So let’s speculate that the Facebook board has provisionally decided that 2012 is their year. Two crucial decisions remain: when and how much?
To determine when, Facebook will be anxiously looking out of the window to gauge the weather on Wall Street and beyond. Of last year’s 10 major tech debuts, seven are under water. The baddest of the bad boys are Demand Media, Renren, Yandex, Skullcandy and Zynga; all underwater.
Groupon, after a massive debut, and even larger sell-off, has settled at around $22 from a $20 IPO price. Crucially for Facebook, however, is LinkedIn’s stellar performance: around $61, up from an offer price of $45.
This is by far the best-performing tech IPO of 2011, with robust metrics on traffic and revenues, and no scares for the markets. In fact it has even been resilient to high-profile moves by insiders to cash in. Could LinkedIn be the social-media John the Baptist, ushering in the saviour?
There is also the macro-economic weather to consider with a European debacle threatening a stock market crash. That could wipe out even the most promising debuts.
If I were Zuckerberg, I would go early. There is every chance 2012 will be another year of fuss and fiddle, leading to shock waves in the fourth quarter. There is just enough political credibility left in the Eurozone to keep an American IPO window open for a couple more quarters, but I wouldn’t push my luck.
Besides, its always best to avoid competing for attention with the Olympics and Presidential elections.
So let’s surmise a second quarter sale. The next question is: at what price? The Goldman round gives a reported baseline of $50 billion. Markets will be looking for a prospectus that promises long-term alternative revenue streams to advertising. Facebook credits look promising. But even with a bullish forecast and tailwinds, $10 billion looks over the top.
Peter Thiel will be instrumental. As both a LinkedIn and Facebook investor, he is already frustrated at the investment banks for over-discounting LinkedIn’s offer price. Banks always look for a 15 per cent discount ‘pop’ to get the institutions interested and guarantee a successful debut.
Given Facebook’s extremely high consumer profile, a Google style IPO auction was originally thought to be the answer, but this is apparently off the table. So, given all the caveats above, what’s the best outcome can we hope for?
A sensibly-priced offer with a full order book will give Facebook a dream debut and a full armoury. It will also silence the Bubble 2.0 faithless who would see either an oversubscribed or an undersubscribed float as proof of new bubblemania.
In reality, we are a far cry from 1999, that momentum stock hysteria where investors were jumping on gravity-defying but ultimately useless and cashless shells. Facebook has real, tangible revenues, speaks to 800 million people and is soon to become the number one display advertiser, beating Yahoo! into second place.
Not only will a successful IPO level the battlefield with rivals Apple, Google and Amazon in the great tech war of 2012, but it will also cement Facebook’s pre-eminence in the social landscape. It will have a dramatic effect on the exit opportunities for venture capital-ripened start-ups.
Smart entrepreneurs should be building businesses today that will catch Zuckerberg’s eye tomorrow. A successful IPO will also set the stage for all the symbiotic social software businesses such as Buddy Media.
It is worth remembering that a mistimed or mispriced IPO could wreak havoc on future exits and market sentiment. Wall Street will resume its tech cynicism and the door will be slammed on an already fragile and febrile exchange. Facebook would be wounded and vulnerable for a long time.
But, in terms of potential revenues, the business behind facebook.com has barely begun to scratch the surface. If successful, Facebook could be the decade-defining public offering.