»The Daily Reckoning by Bill Borner

The Real Reason for Facebook's IPO
11 FEBRUARY 2012

- 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.

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