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Feeling the Facebook frenzy

All time largest global ipos - top 5
Company Name
Offer Date
Deal Size (US$MM)
ABC Bank
Hong Kong/ Shanghai
Hong Kong/ Shanghai
NTT Mobile
Tokyo Stock Exchange
Hong Kong

On the evening of May 17, the price for Facebook’s initial public offering will be set.

The following day, the expectations are for frenzy in secondary-market trading with a significant run-up from the IPO price.

The company is expected to float 337.5 million of its 2.1 billion shares, 2.8 billion including employee equity grants, in the range of US$28 to $35 per share.

The approximate $11.8 billion likely to be raised from the IPO would make Facebook the largest internet-related IPO in history, and the company would have a market capitalisation of close to $102 billion.

Google raised $1.67 billion in its 2004 IPO, creating a market cap of $23 billion for the search giant. Eight years later the company is worth $198 billion.

The largest IPO in US history was that of Visa, a multinational financial services corporation, which raised $17.9 billion. Agricultural Bank of China, raising $19.2 billion, was the largest ever IPO.

It is believed that 15 per cent of the world’s population has a Facebook account. The company claims to have 900 million users, 845 million active monthly, and 483 million on a daily basis. Users post 2.7 billion “likes” or comments per day, in addition to 250 million photos, explaining last month’s $1 billion acquisition of Instagram, a free mobile photo-sharing application.

Facebook posted $3.7 billion in revenue in 2011, an 88 per cent increase from the year before, and a profit of $1 billion. In the first quarter of 2012 alone, Facebook generated $1 billion of revenue, a 45 per cent increase year-on-year, but a 12 per cent decline in net income.

Both revenue and profit were lower as compared to the fourth quarter of 2011. Revenue per user is currently $4.39, compared to Google’s $30 per user and Yahoo’s $8 per user.

Advertising accounted for 82 per cent, or $872 million, of Facebook’s first-quarter revenue, a mere 1 per cent of the world’s $507 billion in total ad spending. Facebook’s other revenue stream is Facebook Credits, its payment system for purchases within apps and games, generating revenues of $186 million.

Revenue from Zynga, which makes FarmVille and other games played on Facebook, represented 12 per cent of Facebook’s total revenue in 2011.

While the numbers and metrics are impressive, investing in the company is not free of risk, especially on the first day of trading.

Institutional investors and the most favoured brokerage clients will likely be allotted shares at the IPO price, while most of the investing public will have to purchase stock in the secondary market, and likely at a significantly higher level.

Recent internet-related IPOs such as Pandora Media and Groupon had spectacular gains on their IPO premiere date, only to subsequently drop, both examples still trading below their first day closing prices.

PPWSA is a good local example of a skyrocketing price on the IPO, but following a series of price drops, trading well below the closing price on its launch date. Facebook is also facing increasing regulatory and legal hurdles, especially concerning privacy and data protection.

The company is already engaged in numerous class-action lawsuits. Other risks issues are emerging competitors – remember MySpace – overlap of social media platforms absorbing time away from Facebook, and decline in popularity.

If the IPO price tops $35, the company will be trading at a price-to-earnings ratio of 100, as well as 25 times revenue. Those fortunate to be allotted shares in the IPO just might cash in after the anticipated price surge.

Anthony Galliano is chief executive of Cambodian Investment Management.



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