The Real Reason for Facebook's IPO - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 11 February 2012
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- By Asad Dossani, Author, The Lucrative Derivative Report

Asad Dossani
At the start of this month, the financial press had something big other than the global crisis to talk about. Facebook has declared its intention to file for an initial public offering , and is planning to raise $5 billion in the process. This is company that started just 8 years ago, and now has approximately 1 out of every 8 people on the planet as its customers.

There is no doubt that Facebook is an exceptional company, in terms of its growth, and the popularity of its product. The IPO is likely to see the company achieve a valuation of US$ 80bn - US$ 100bn, which will make it as one of the largest public offerings ever.

An important question to ask is why the company is going public in the first place. How will this IPO enable Facebook to continue its growth and success? Most companies raise cash through an IPO so that they can invest it and grow their business. What exactly is Facebook planning to do with the $5 billion it will raise?

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In Facebook's prospectus, they made some interesting and surprising claims. First, their current cash flow and credit would be sufficient to meet their operational needs in the future. So, it seems they don't need any additional cash right now. This makes sense. They have achieved such high growth already as a private company, so why exactly do they need to raise more money?

Facebook further states that they intend to use the $5 billion to invest in government bonds and savings accounts and then pay the tax due on converting shares given to employees as part of the IPO. There is no mention of using any of the funds raise to expand and grow the business.

So if Facebook doesn't need the money, why go public in the first place? Facebook themselves answer this question. They state that they are going public for the benefit of their employees and investors, to make their equity stakes valuable and liquid.

Thus, their motivations for going public are crystal clear. They are going public so that they can cash in for themselves. This is great news if you are an investor or employee of Facebook. Though, it is bad news if you are end up as one of Facebook's new shareholders following the IPO.

The IPO is structured in such a way that founder and CEO Mark Zuckerberg will still retain majority control when it comes to voting rights, so new shareholders will have no say in the running of the company. Again, this is bad news for potential new shareholders.

As we mentioned before, Facebook is an exceptional company. No company has achieved such high growth at such a large scale. But their planned IPO is far from exceptional. Its purpose is to allow early insiders to cash in their holdings, to the detriment of the new shareholders.

is a financial analyst and columnist. He actively trades his own and others' funds, investing primarily in currency, commodity, and stock index derivative products. Prior to this, he worked at Deutsche Bank as an analyst in the FX derivatives team. He is a graduate of the London School of Economics. Asad is a keen observer of macroeconomic trends and their effects on global financial markets. He is deeply passionate about educating investors, and encouraging individuals to take part in and profit from financial markets. To put it colloquially, he wishes to take Wall Street products and turn them into Main Street profits!

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5 Responses to "The Real Reason for Facebook's IPO"

sunilkumar tejwani

Feb 13, 2012

Only those fools who subscribe/ invest in the IPO of Facebook will be the losers. Smarter will be those who go short on it after the initial euphoria dies down. for the obvious reasons: due to intense selling by the insiders the stock will come down like nine pins.

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Sundar

Feb 13, 2012

As long as promoters'/management's commitment to the company, its growth, profitability etc. are not compromised, I see no reason why FB should not make an IPO. If promoters and initial investors seek partial exit or employees want liquidity of their company's shares, that by itself cant be bad news. Yes, if company manages to continue its growth in future then new shareholders will also certainly benefit.

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Sivasankaran

Feb 12, 2012

It is pure a bubble.. This company will vanish in another few years time - so before that existing stakeholders of the company will make quickest biggest bucks and enjoys their life.. How long people can waste their time in walls and knowing what others are doing and updating the details of their own personal things.. Is it boring and non-productive and non-value adding timewasting behaviour? This will go down as sensation during the tech growth.. Soon Die Social Network..

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Abraham Varugis

Feb 12, 2012

I feel your criticism is unfair and unrealistic. If the promoters and existing investors who took the risk and created this goldmine certainly should be able to encash their success. Also the employees who also had a part in the building of this success story certainly have more right to encash their success than prospective new investors who are trying to piggyback a proven success. Anyway Facebook is at least giving an opportunity to prospective investors to participate as shareholders IF THEY WANT TO.
THUMBS DOWN TO YOUR SELFISH AND UNFAIR COMMENTS

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Girish Sumaria

Feb 11, 2012

Weekend editions of DR by Asad have been so meaningful and relevant to India economy. But topic he picked up today was sheer waste of time. Facebook, by no means is a productive company and talking about such company on equitymaster platform just does not make sense..

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