First appeared in Wall Street Journal
Facebook Inc. filed for an initial public offering Wednesday
that could value the social network between $75 billion and $100 billion,
putting the company on track for one of the biggest U.S. stock-market debuts of
all time.
The company hopes to raise as much as $10 billion when it
begins selling shares this spring, said people familiar with the matter.
Potential buyers got their first look at its financials Wednesday, which showed
the company produced a $1 billion profit last year from $3.71 billion in
revenues. The company derives 85% of those revenues from advertising, with the
rest from social gaming and other fees.
In just eight years, Facebook has become the world's social
bazaar, where friends gossip, play games and swap 250 million photos per day.
It has also emerged as a potent political tool, helping to topple regimes across
the Middle East last year.
But for all its success, the question remains just how
Facebook will manage its growth into a mature, global business, keeping both
advertisers and subscribers happy while balancing demands of privacy and
profits. The filing left a few clues that Facebook's founder, 27-year-old Mark
Zuckerberg, is worried about how wealth and public scrutiny may change the
company's culture.
At Facebook's offices, employees went about business as
usual Wednesday, said one person, enjoying a lunch of lobster bisque, braised
beef, Moroccan couscous and apple, cream and honey galette for dessert, said
another. A stack of giveaway posters left in a kitchenette at Facebook
headquarters read "Stay Focused & Keep Shipping," according to a
photo shared by Facebook employees. Mr. Zuckerberg shared a photo on Facebook
of the flyer on his desk.
Looming a few months away is Facebook's giant offering,
which would top rival Google Inc.'s 2004 IPO. It holds the record for the
largest U.S. Internet IPO by raising $1.9 billion at a valuation of $23
billion. Among U.S. companies, only Visa Inc., General Motors Co. and AT&T
Wireless have held larger offerings than $10 billion. In the filing with the
Securities and Exchange Commission, Facebook said it is seeking to raise $5
billion, but that figure is a placeholder and will likely grow.
While Facebook is growing fast—revenue grew 88% from a year
earlier—the sales figures it released were lighter than some had expected. One
widely cited outside estimate from research firm eMarketer pegged Facebook's
revenue for 2011 at $4.27 billion.
Still, Facebook's membership growth has been staggering. The
company said in its filing that it has 845 million users globally, up 39% from
a year earlier.
The IPO is set to unleash a wave of wealth across Silicon
Valley and yield potentially $100 million or more in fees for Wall Street banks
managing the offering, including Morgan Stanley, J.P. Morgan Chase & Co.
and Goldman Sachs Group Inc.
The company chose "FB" as its ticker symbol but
hasn't decided whether it will trade on the New York Stock Exchange or Nasdaq
Stock Market.
Mr. Zuckerberg had been famously reluctant to push forward
with an IPO. In early 2010, he told The Wall Street Journal that he was in
"no rush" for Facebook to go public.
The CEO owns around 28% of the company and holds 57% of its
voting share power, according to the filing. Mr. Zuckerberg will sell shares in
the IPO and will use the proceeds to pay taxes, it said. The filing doesn't say
how many shares the CEO intends to sell.
People familiar with Mr. Zuckerberg's thinking said he has
long been fearful of the damage an IPO could do to the company's culture. He
wants employees focused on making great products, not the stock price, they said.
Mr. Zuckerberg's thinking began changing when Facebook
realized in 2010 that it would have more than 500 shareholders by the end of
2011, which would trigger a regulatory requirement that the company start
publicly reporting financials. Mr. Zuckerberg decided it made more sense for
Facebook to go public and reap some financial benefit from an IPO.
Facebook also still faces questions about its commitment to
its users' privacy, an issue that had dogged it since its earliest days.
Despite a settlement last year with the Federal Trade Commission in which the
company agreed to independent privacy audits for 20 years, privacy advocates
worry about the vast trove of user data it owns. Mr. Zuckerberg has promised
users he is committed to protecting their privacy.
Facebook takes pains to mention the importance of privacy,
mentioning the word 35 times in the filing, and even listing its "privacy
and sharing settings" as one of the ways the company creates value.
In a letter to potential shareholders, Mr. Zuckerberg—who
has long eschewed the business side of Facebook—said he plans to continue
focusing on building products, rather than sales growth. "We don't build
services to make money; we make money to build better services," Mr.
Zuckerberg wrote. "These days I think more and more people want to use
services from companies that believe in something beyond simply maximizing
profits."
Overall, Facebook's annual revenue growth is slower than
other tech companies who have staged IPOs recently. Groupon's revenue grew 695%
for the nine months ended September 2011 from a year earlier. Zynga's revenue
more than doubled for that same time period.
Unlike some other newly public Web companies, Facebook is
profitable, with 2011 profit up 65% from the year earlier period. But growth
has its costs. The company's research and development expenses ballooned last
year to $114 million in 2011 from $9 million in 2010, primarily due to growth
in employee head count and equity compensation. Facebook's costs and expenses
are going up faster than revenue. It employs 3,200 as of December, up from
2,172 a year earlier.
Debra Williamson, an eMarketer analyst who had estimated
Facebook's 2011 revenue at $4.27 billion, called the company's revenue
"disappointing."
But Kevin Landis, portfolio manager of Firsthand Technology
Value Fund, Inc., which has bought Facebook shares in the secondary market,
said he wasn't disappointed and hopes to buy more stock when Facebook goes
public. "This is a company that has only just begun to scratch the surface
of making money off those hundreds of millions of people getting on Facebook
every day," he said.
Social gaming has become an increasingly important part of
Facebook's business. The company generated $557 million in revenue from
partners such as Zynga who sell virtual goods last year.
Facebook's revenue is still driven by online ads. The number
of ads delivered on the site grew 42% and the average price per ad grew 18%
over 2011 from 2010, according to the filing.
The company attributed the improvement to a vast trove of
information that allows marketers to "show their ads to a subset of our
users based on demographic factors such as age, location, gender, education,
work history, and specific interests that they have chosen to share with us on
Facebook or by using the Like button around the web or on mobile devices."
