In such as high-tech, real-estate, healthcare, financial services,

            In
today’s age, many companies in various sectors such as high-tech, real-estate,
healthcare, financial services, etc. have start-up companies. Remaining private
has its benefits, but expanding your brand is mainly where the nucleus is. With
the amount of attention generated by a company’s success, they expand their
brand by in simple terms “going public (if you’ve seen the move “The Wolf of
Wall Street” you know what I’m talking about). By doing so, this is called an
IPO. IPO stands for initial public offering. When a company becomes public, the company begins to initially
offers shares of stocks to the public and the company is listed on an exchange.
Companies tend to go public for various reasons, which will be stated
furthermore in this paper. This paper tends to provide a thorough analysis of
an example of a company that went public known as “Facebook” which did so in
2012. For a company to go public, there is a step by step process on how a
private company fuses itself into the stock market. Once a company “goes public”,
it is registered with the SEC. SEC stands for Securities Exchange and Commission. The process starts by
filing a form known as the S-1. The SEC reviews the filing and sends back very
detailed comments. The company then files an amendment reflecting these
comments. The SEC comments again. This process repeats until the SEC says it
has no further comments. The company then files/prints a “red
herring” or Preliminary Prospectus and begins the tour. This usually lasts
2 weeks and the offering is priced on the last night of the tour and begins trading
the next day. In total, the process of becoming a public company takes from
about 2 weeks minimum to three months maximum, depending on the company and its
advisors. In most cases, a company plans to become public a year before the
declared IPO, in preparation for the legal fees. The SEC reviews the
registration statement to make sure that the company has disclosed all the
information necessary for investors to decide whether to purchase the stock.
Once the company has satisfied the SEC’s disclosure requirements, the SEC
approves the stock for sale to the public. The company prepares the final
registration statement and final prospectus containing all the details of the
IPO, including the number of shares offered and the offer price. Details of the
proposed offering are disclosed to potential purchasers in the form of a
lengthy document known as a “prospectus.” Once the IPO process is complete, the
company’s shares trade publicly on an exchange. The lead underwriter usually
makes a market in the stock and assigns an analyst to cover it. By doing so,
the underwriter increases the liquidity of the stock in the secondary market.

Basic
Theory/Principles:

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As mentioned
earlier, an IPO is an initial public offering when a company plans to go public
on the stock market. Prior to a company going public, the company is private,
which consists of relatively a small number of shareholders made up of early
investors, (which includes the founders, family, and friends) as well as angel
investors or even venture capitalists. In IPOS there are two types of offerings,
known as Primary and Secondary. A primary
offering are the shares that are sold in the IPO may either be new shares
that raise new capital. This is what happens when a company offers the first
shares of stock to the public. A secondary
offering or existing shares that are sold by current shareholders (as part
of their exit strategy). Some companies, for example Facebook had a secondary
offering and made a huge comeback. The lead underwriter is the primary banking
firm responsible for managing the deal. The lead underwriter provides most of
the advice and arranges for a group of other underwriters, called the
syndicate, to help market and sell the issue. Additionally, funding rounds are
a type of funding round used for venture capital financing, by which startup
companies obtain investment, generally from venture capitalists and other
institutional investors.

Formulas:

Many investment
firms and other companies use several formulas to determine whether to invest in
a certain public company. NPV stands for Net Present Value. We use this to
compare the costs and benefits of a project in terms of a common unit known as
dollars. Earnings per share is a firm’s net income divided by the total number
of shares outstanding. As mentioned earlier, NPV stands for Net Present Value.
NPV=PV. The formula for NPV is NPV= PV(Benefits)-PV(Costs). By using positive
cash flows to present benefits and negative cash flows to represent costs, the
formula gets broken down to NPV=PV (All project cash flows). Another key
formula used for company’s that plan to go public is: Post-money Valuation =
Pre-money Valuation + Amount Invested. Hedge funds tend to use these formulas
to create reports and to make key decisions on whether to invest in a certain
company. A Hedge fund is when a limited partnership of investors which use high
risk methods, such as investing with borrowed money, in hopes of getting large
capital gains in return. This formula can be applied to IPO’s and specifically
to Facebook.

Data:

Facebook is a very
popular social networking website and went public on Friday May 18th,
2012. Facebook was the biggest IPO in history on the stock market. Facebook
racked in $16 billion USD. Before Facebook had gone public, in 2007, Microsoft bought
a 1.6% stake in the company, worth $240 million USD. When the company went
public, the stake had grown to over $1 billion USD, quadrupling its value
(4.17x to be exact). According to Facebook’s SEC Statement: The trading price
of our Class A common stock has been, and is likely to continue to be,
volatile. Since shares of our Class A common stock were sold in our IPO in May
2012 at a price of $38.00 per share, our stock price has ranged from $17.55
(September 2012) to $133.50 through December 31, 2016. Facebook’s price tag per
share increased $115.95 over 4 years, rising $28.9875 per year. After Facebook
went public, it’s P/E ratio was at 85% despite        Financial results for Facebook 2016 were
impressive in comparison to 2015. According to Facebook’s Management Discussion
of Financial Condition and
Results of Operations, revenue
had increased from $27.64 billion, up 54% year-over-year, and ad revenue was
$26.89 billion, up 57% year-over-year. Net income was $10.22 billion with
diluted earnings per share of $3.49. According to CrunchBase, valuation at IPO
for Facebook was at $104 billion USD. According to their SEC report, “in 2016,
we continued to make progress on our three main revenue growth priorities: (i)
continuing to capitalize on the shift to mobile, (ii) growing the number of
marketers using our ad products, and (iii) making our ads more relevant and
effective through continued adoption of newer ad formats and tools for marketers.”
Facebook has a current share price worth over $175 and this number continues to
grow.

Facebook is listed
on the table to the right in the category as the 3rd largest U.S IPO.
Additionally, Facebook is the 6th world’s largest IPO. Morgan
Stanley (lead underwriter) had made a deal worth $16,007 Million USD.

Here is a revenue/eps summary for the
fiscal years from 2015-2017. Facebook’s Revenue and EPS had increased over the
fiscal year as well as monthly. A lot of these factors are due to Facebook’s
popularity and high number of users, as well as Facebook’s increasing number of
acquisitions. Facebooks two popular acquisitions were mainly WhatsApp and
Instagram as they company bought out their competition worth ($1 billion and
$22 billion respectively). Recently, Facebook has expressed interest in buying
out Snapchat, however the CEO of Snapchat Evan Spiel turned down the $3 billion
offer. Facebook still expresses this interest to this very day and has made
more offers to Snapchat.  

 

Cash used in investing activities was
$11.74 billion during 2016, mostly due to $7.19 billion for net purchases of marketable
securities and $4.49 billion for capital expenditures as we continued to invest
in data centers, servers, office buildings, and network infrastructure. The
increase in cash used in investing activities during 2016 compared to 2015 was
mostly due to increases in capital expenditures and net purchases of marketable
securities

According to the chart above, cash flows
have increased from 2014-2016 showing gains across the board.

 

As you can see above, Facebook has
demonstrated increased revenue all over the world, signifying that it has made
tremendous gains yearly.

 

 

            Facebook
daily active users has continued to increase yearly.

            Facebook is a strong company,
financially secure from it’s IPO in 2012.  Net cash has increased in operating,
investing, and financing, although investing and financing has shown a net loss
as listed above.

Analysis:

            Facebook has shown strong growth
from it’s IPO in 2012. Revenue has increased, diluted EPS has increased as well.
In addition, the number of acquisitions made by the company has increased its
revenue opening the door from more acquisitions to follow suit. According to CrunchBase (which
provides a business information platform that pairs powerful tools and
applications to stay competitive and successful) Facebook has made 71
acquisitions. Two key acquisitions being WhatsApp and Instagram, as mentioned
earlier. Facebook’s Earnings Per Share has increased drastically from 2015 to
2016, increasing revenue by $10,000 Million USD and increasing the EPS by
$2.20. Facebook made a huge comeback in the end of 2013 when Facebook announced
it would be doing a secondary offering consisting of 70 million shares, more
than 40 million off them being CEO Mark Zuckerberg’s. Several reasons that this
had occurred was due to the company drowning in lawsuits, as it happened a day
before being in the S 500, and due to Facebook needs to generate capital
to use it for corporate and general purposes.

Pros
& Cons:

            There
are many advantages of a company going public. The two main advantages for a
private company going public are greater liquidity and better access to
capital. When a company goes public they give a chance to their private equity
investors the ability to diversity. This gives companies a chance to increase
their equity. In addition, public companies usually have access to much larger
amounts of capital through the public markets, both in the initial public
offering and in subsequent offerings. Facebook has a total funding amount of up
to $2,335, Another advantage of going public is employee stock options,
bonuses, and other performance incentives that attract the best minds and keep
key personnel in place. Finally, the ability to raise large amounts of growth
capital quickly. As mentioned earlier, funding rounds help companies like
Facebook and generate capital quickly in a short period of time. Similarly,
millions of dollars of equity financing can also be raised overnight—money that
can be used to fund growth initiatives like launching new products and markets,
hiring more employees, investing in research and development, and funding
capital expenditures. Facebook has successfully generated capital and has seen
a huge benefit in going public. Facebook has increased it’s daily active users
as increased as mentioned earlier. Facebook’s secondary offering took off which
made it very successful. Here are the stats of Facebook’s secondary offering:

         
1)
Consisted of 70 Million shares

         
2)
Announced in December 2013

         
3)
Worth $4 Billion

         
4)
Offering priced at $55.05 per share

         
5)
CEO Mark Zuckerberg sold 41.4M of his Class A Common Stock

         
Reasons
for Secondary Offering:

         
1)
Lawsuits:  S-3 reported an ongoing legal
case around securities violations during its IPO last year and “seeking
unspecified damages.” It further notes that “We believe these lawsuits are
without merit, and we intend to continue to vigorously defend them,” but also
that “Such lawsuits or inquiries could subject us to substantial costs, divert
resources and the attention of management from our business, and adversely
affect our business.”

         
2)
Inclusion into the S&P 500. Releasing of more shares.

         
3)
Facebook noted that it will be used for working capital and general corporate
purposes:

         
“Our
principal purpose for selling shares in this offering is to obtain additional
capital. We intend to use the net proceeds to us from this offering for working
capital and other general corporate purposes; however, we do not currently have
any specific uses of the net proceeds planned. Additionally, we may use a portion
of the proceeds to us for acquisitions of complementary businesses,
technologies, or other assets.”

         
Today,
Facebook’s share price is at $175.

On the downside,
going public doesn’t seem to be a good idea. One of them being is undertaking
an IPO. Some IPOs can be undervalued, and this is what had happened to
Facebook. Facebook’s original share price was set to be between $28-35, however
Facebook’s initial share price was at $38. In September 2012, the company had
seen a significant drop in their price tag of shares to $17.55. When investors
diversify their holdings, the equity holders of the corporation become more widely
dispersed. Also, the lack of ownership undermines investors ability to monitor
the company’s management which leads to investors discounting the price they
are willing to pay. Additionally, another disadvantage of a company going
public is high-profile corporate scandals. Scandals such as Enron, Tyco Ltd., Bearn
Stearns Companies Inc., Ponzi Scheme in 2008, Adelphia Communications Corp.,
Martha Stewart Scandal, etc. This led to tougher regulations not only by the
SEC (Securities Exchange Commissions), but to the security exchanges including
the New York Stock Exchange and NASDAQ, as well as on the federal level through
Congress (through the Sarbanes-Oxley act of 2002). Compliance with these new
standards is time consuming and has a high price tag for public companies. This
can be seen with Facebook. Facebook has been subject to serious litigation,
which is what it still faces to this very day. For example, “Beginning on May
22, 2012, multiple putative class actions, derivative actions, and individual
actions were filed in state and federal courts in the United States and in
other jurisdictions against us, our directors, and/or certain of our officers
alleging violation of securities laws or breach of fiduciary duties in
connection with our initial public offering (IPO) and seeking unspecified
damages. We believe these lawsuits are without merit, and we intend to continue
to vigorously defend them.” This just goes to show you how having your company
go public can be a headache for the management level of such companies. “In
addition, we are currently the subject of stockholder class action suits in
connection with our IPO and with our intention to create a new class of capital
stock (Class C capital stock) and to declare and pay a dividend of two shares
of Class C capital stock for each outstanding share of Class A and Class B
common stock (the Reclassification). We believe these lawsuits are without
merit and are vigorously defending these lawsuits. On December 11, 2015, the
court granted plaintiffs’ motion for class certification in the consolidated
securities action. In addition, the events surrounding our IPO became the
subject of various state and federal government inquiries. Following our
announcement of the Reclassification, beginning on April 29, 2016, multiple
purported class action lawsuits were filed on behalf of our stockholders in the
Delaware Court of Chancery against us, certain of our board of directors, and
Mark Zuckerberg. The lawsuits have been consolidated under the caption In re
Facebook, Inc. Class C Reclassification Litig., C.A. No. 12286-VCL, and the
consolidated complaint generally alleges that the defendants breached their
fiduciary duties in connection with the Reclassification.”

Finally, another
downside of a company declaring its IPO is the
real possibility of an unsuccessful one in which investors simply don’t
purchase shares when they evaluate risk versus reward. Meaning, some investors
will choose not to invest in a company resulting in a net loss of the company’s
revenues. Another major downside of accompany going public is the increased
risk of legal exposure. A company and its directors/officers will be subject to
potential liability under the federal securities laws for material
misstatements or omissions in its SEC filings and other public disclosures.” Facebooks IPO had
a ton of downside to it. Lawyers had blamed Facebooks horrible start to a
glitch on NASDAQ (Within twelve trading days of Facebook’s IPO, the share price
had decreased to $25.87 from $38, (a 32%) drop which worried many investors.
Many investors had invested first in the company and then had asked questions,
instead of asking questions then investing in the company. Facebook’s Road Show
was held on May 3rd, 2012. Morgan Stanley (the underwriter)
discloses the share price from $28 to $35. As mentioned before, many IPOS are
underpriced and this is what had happened to Facebook. Finally, another IPO
issue is that there was an estimated $630 million-dollar loss according to
Bloomberg. Even though Facebook made a huge comeback, they still suffered
tremendously in the beginning.  

Conclusion:

            A
company going public has its downfalls and its upsides. Some companies should
go public, like Facebook. Some companies should not go public/ never go public
due to lack of resources.  After this
analysis of Facebook, it is safe to say that Facebook is a very successful IPO,
even though as mentioned earlier, it had a huge downfall in September 2012,
when its shares price had dropped to almost 20$ its original share price at
$38. Nonetheless, Facebook has demonstrated strong growth over the years,
increasing the net worth of the company, as well as making over 71 acquisitions
(such as WhatsApp and Instagram as mentioned earlier) in some minor and major
companies. Additionally, Facebook has demonstrated growth in the quarterly
reports yearly, each showing upward trends and making tremendous financial
gains. Hedge funds use various templates to determine whether to invest in a
certain company. Hedge funds assess the company’s products competitor’s
acquisitions and do an analytical assessment. This assessment is important
because hedge funds analyze common stock as well as financials. Financials are
important to determine and see who invested in this company previously. Other
syndicates that contributed to the IPO were Morgan Stanley, JPM, BoA, Barclays,
Deutsche Bank, RBC, Wells Fargo Citi, and Goldman. It’s safe to say that not
all companies should go public on the stock market. Some companies should
remain private and wait to get the appropriate investors. Facebook has received
many offers from investors however CEO Mark Zuckerberg did the right thing by
waiting for the company to go public. Facebook is a great company with over a
billion users and is guaranteed success in the coming years. To find out more
information about Facebook, you can watch the movie “The Social Network” which
was released in 2010 and talked about Facebook’s upbringing.