Let me jump on the bandwagon and talk about Facebook. Based on various media reports and a
number of Facebook insiders I’ve spoken with, this uber social networking site now
has close to 450 million registered users (up from 200 million not too long ago). That is an unprecedented scale in the
history of the Internet which means that this is an incredible asset they could
mine and leverage if they’re planning on pursuing an Initial Public Offering
(IPO) of their shares.
Let’s do the math – for the sake of simplicity, let’s assume that only half
a percent of Facebook users believe enough in its sustainability and at the
same time have the financial wherewithal that they would be willing to buy shares
in an IPO. That would potentially
equate to around 2.25 million potential IPO buyers (a retail brokerage shop’s
dream come true). Let’s then
assume that Facebook prices its IPO around the same level where Digital Sky Technologies (DST) bought in when
they invested $200m+ in exchange
for a 1.96% stake in the company. That
would equate to about a $10 Billion pre-money valuation.
It’s important to note that Facebook common shares have traded as high
as $22 Billion in some secondary exchanges like Second
Market or Shares
Post and the $240 million investment from Microsoft was done around the $15 Billion range (both
Microsoft & DST investments were preferred securities which carry a liquidation preference).
While all these numbers seem high on the surface, a $10 Billion
valuation would be approximately 10x Facebook’s 2010’s consensus revenues of
around $1 Billion or
slightly higher than Google’s revenue multiple of 8.1x when it went public in Aug 2004. Although some say that Facebook’s 2010
revenues could be as high as $1.2 to $2 Billion but let’s just stick to the $1B to be
“conservative.”
Of course putting a burden on the potential buyers wouldn’t be a good
idea so let’s design this to be a relatively inexpensive undertaking for the
2.25 million potential buyers that Facebook would allocate (and limit) only 10
shares per potential buyer each priced at $50 per share. That would translate to about $500 per
potential buyer which doesn’t strike me as expensive for true Facebook diehards
– I’m not a diehard but I wouldn’t mind participating myself just to be part of
a potentially historic financing event.
Just like most IPOs where companies sell anywhere from 10% to 25% of
their company’s shares, let’s assume Facebook would only be willing to offer
10%, again comparable to the 7.2% Google offered when they went public (5.2%
from Google directly and another 2% from Selling shareholders).
At $50 per share multiplied by 10
shares per buyer, that would generate around $1.13 Billion for their corporate
war chest. That amount would be
unheard of in any growth financing round not to mention I doubt anyone has that
big of a bite size not even from large venture or private equity players. Of course that amount can be syndicated
between many large institutional investors but I doubt enough people can get
comfortable at these valuation levels with those types of investment
dollars. In other words, the
reality for Facebook is really just an IPO if there’s ever a need for them to
raise a real sizeable chunk of growth capital. Absent another Yahoo! type offer from Microsoft ($45B), I just think Facebook has become too large
(and unique) to be acquired through conventional means.
So here’s a quick table just so you math diehards can easily verify my
calculus.
I’m not going to get into the complexities of an IPO distribution
process but given the scale of Facebook’s community, this could be less complex
vis-à-vis an ordinary company trying to reach out to 2.25 million potential
retail accounts. Vonage did this when they went public in 2006. While that may seem a bad example since
the Vonage IPO failed miserably, it failed not because they tried to make their
customers their shareholders, it failed because it’s a lousy money losing
business. Facebook already has
a loyal captured base so it shouldn’t be that difficult to reach out to their
flock (they just need to make sure they adhere to regulatory requirements). Think “network effect.” Imagine the PR frenzy it would generate
which will lead to even more users – let’s not forget that Twitter benefited quite a bit from the “Oprah
Effect.” I suspect this will have the same
effect. I don’t mean to minimize
the process – I could hear the criticisms already from Wall Street
traditionalists/purists screaming that this would be a bad idea because without
their involvement there wouldn’t be aftermarket support, no analyst following, no
institutional base, etc, etc. All
I’m saying is this is very feasible if Facebook chooses to leverage its
inherent advantages (community, technology, human network, media darling
status, etc.). By the way, Wall
Street firms can still get involve post-IPO by putting their book of clients to
support the stock in case most of these potential buyers turn out to be
punters.
Historically, IPOs have cost companies around 6–7% although at this
scale it’s going to be around 3%.
Google’s $1.67 Billion IPO cost the company 2.8% in underwriting
commissions or around $47m. So
assuming the same rates, Facebook should be able to save around $34 million in
commissions and probably more in ancillary expenses. Of course Facebook still has to spend on legal fees but
that’s totally unavoidable in a highly regulated IPO process. While $34+ million may seem a drop in
the bucket for a company that could potentially be worth north of $10 Billion
(perhaps even $20-30B), that’s still a boat load of money so there’s nothing
wrong in trying to avoid that cost – why give that to Wall Street when you can
put that to better use like improving the site. This is especially true for somebody like Facebook where it
already has a loyal base that would be a good source of its future
shareholders. Given FB’s unique
dynamics, Wall Street firms have little to no value here. Facebook is in a unique (and perhaps
privileged) position to credibly try to “democratize” the IPO process. To be clear, I’m not advocating a Dutch auction IPO, just a conventional one. The only difference in what I’m
advocating is the manner in which the IPO shares should be distributed.
I realize the devil is always in the details so I’ll leave the
complexities of such a concept to the experts but Facebook should seriously
consider going down this path as it might just create a whole new way of
leveraging its most valuable asset and at the same time align its interests w/
its users. Imagine a giant social
network where its own users are its own stakeholders. This might just give a new meaning to the expression “eating
your own cooking.”
