The Facebook IPO has finally arrived with a filing expected as early as Wednesday morning in US. Morgan Stanley will lead the IPO, along with help from Goldman Sachs, JP Morgan, Barclays and Bank of America. This makes Morgan Stanley the biggest underwriter for Silicon Valley – all banks combined can make up to $250-$500 million out of the deal.
With IPO size expected between $5 to $10 billion, it will be among the largest IPO by an Internet/technology company (biggest being Infineon at $5.9 billion). The Google IPO raised $1.9 billion at a valuation of $23 billion, and here the valuation is expected to be $75 to $100 billion. Once Facebook starts trading the exact market capitalization will be established – in case of a $100 billion market cap, it will be behind Google (with market cap of $189 billion).
As per different reports Facebook revenue is over $4 billion for the year 2011, and expected to cross $6 billion in 2012. Most of this revenue is from advertising on Facebook – which allows targeting that is not available in any other platform. With a base of 800 million users and their personal data – that is the biggest driver of valuation for the firm.
Facebook hopes to surge the revenue by capturing more data and using this data for targeted advertising. The rich data is captured while users “like” and engage on Facebook by streaming music, playing games and other activities. Facebook Connect and sites using open graph protocol add more knowledge about the customer to the Facebook data reservoir.
The IPO is touted to bring back the boom in Internet/technology markets in US and establish the fact that these are valuations that do not indicate a bubble, although Facebook has to perform very well in terms of revenue to stay in the league of $100 billion market cap. To achieve this goal Facebook may come up with new advertising formats which are more intrusive and use more personal data.
Another source of Facebook revenue is Facebook Credits – which 30% fee out of the payments in Facebook app universe. Today it accounts for around 10% of the revenue, this model has to really grow for Facebook to hedge the advertising model – which is the mainstay.
Overall the most interesting part is that the Facebook data will finally be out, and all the claims will be tested. Google has stood the test of time with 2011 revenues over $37 billion with a net income coming close to $10 billion. Facebook is really far from these numbers and needs to show promise turn into reality to maintain the market cap. It is “reality time” for Facebook as time is over for speculated data and massive valuations. Now it will be real data with real market cap and quarter on quarter performance pressures of business metrics.
Another interesting part is to see the share holding structure in the company and the way corporate hierarchy and management structure is defined. Also the fact that will they bring in a professional CEO like Google did with Eric Schmidt. In the post-IPO scenario, the firm with enjoy financial flexibility and will allow stakeholder to raise money in different ways. It also allows stake holders to cash out, which has been a topic of debate and some blogs do point out this is one reason for going IPO.
Sandeep Amar, Head (Marketing, Audience and Pre-Sales) at Indiatimes writes about the debate on e-commerce valuations in India. He blogs at sandeepamar.blogspot.com. The views expressed below are his personal views.