Facebook, Inc: The Initial Public Offering Case Solution & Answer

Facebook, Inc: The Initial Public Offering Case Solution

Facebook can offer its stock in case of acquisition of a company such as Instagram. The credibility and exposure to the public will also be increased by registering in a stock exchange.Facebook is on an increasing trend;only a few companies have achieved such growth in a short span of time on such a huge scale. The statements show a huge amount of equity invested in Facebook. Its planned IPO continues to meet up a tax obligation that will be generated by going public.

The IPO is planned in such a manner that the CEO will still have most of the control over voting rights. Meanwhile, the CEO doesn’t want to lose his control over Facebook as he has worked hard in the establishment of the company.

Mark Zuckerberg has command over appointments of directors and he can control and manage different internal affair of Facebook. He has 28% privileged class B shares of Facebook.He further manipulates surrogate control of 30% of Facebook’s class (A) share.However, this would not be beneficial for the company in the long run.

Worth of Facebook share

Facebook has been facing an immediate decline in its share price. A decline can be seen in IPOs of Group on and Zynga, whereas Linked In has increased its share price.Facebook has initiated its IPO at around $28-$35 dollars at an estimated value of $100 billion and later shifted to a price $38 per share. Facebook increased its IPO tremendously as it is 100 times of its total earnings per share and 26 times of its sales per share.

According to the discounted cash flow analysis, the IPO was estimated at a value of $32.44. The price of IPO is 117% of estimated price per share. Facebook generates 85% of its revenue from advertisement and it has a database of over 901 million monthly users and 526 daily users. The valuation for the IPO is 100 times its earnings, which  means its earning yield ratio is1%. The net yield ratio of the company will be reduced to.85% by paying 15% tax dividends if the company pays its profits as dividends to shareholders. However, this will consume a lot of time to increase the capital invested on the company.

There are two prices recommended to the company. The first recommended price for Facebook is computed by taking its mean multiples for enterprise value per sales,which are 4.1 as compared to Facebook’s 11.2.By changing it with mean multiples, we get an IPO of 14,while the other is Damodaram estimated price, which is $32.44

Recommendation

The figures conclude that Facebook was overvalued in terms of its IPO. However, now Facebook is looking to raise a total of 421,233,615 shares of Class A.The hype produced by Facebook will cool down after a certain period of time and the price for its share will also reduce, as a result it will take few years for Facebook to be stabilized.

It will be exciting to see how Facebook will operate as a public company. Information regarding Facebook should be considered for future investments. Mark should watch over the activities of the IPO. Moreover, he should also review reaction of stockholders and reaction by the company on it.

Mark Zuckerberg owns 28% percent of shares with a right of 56% on the company’s decisions. This figure depicts an autocratic approach, which can lead the company to its downfall as the performance of the overall company will deteriorate as the decision will be solely on the CEO.An example of acquisition of Instagram can be seen in this case. The decision of acquisition was solely taken by Mark Zuckerberg as he did not take advice from financial advisors. Decisions like these can be appreciable for private companies but can cause huge loss for public entities.

Other factor which led Facebook to set an IPO of $38 was the increase in the users of its mobile application.Thus, it can be seen that Facebook offers a free version of its application. However, this factor will not cause a boom in the revenue as most of the people have shifted from desktop to mobile. It is also not proven that Facebook will succeed its ambitious in mobile world………………..

This is just a sample partial work. Please place the order on the website to get your own originally done case solution