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The Facebook IPO

Last week Facebook filed paperwork for an IPO with a suggested total market value of $85 to $100 billion.
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Last week Facebook filed paperwork for an IPO with a suggested total market value of $85 to $100 billion.

It's safe to say there hasn't been this much excitement for a new Initial Public Offering (IPO) in the tech world since Google took a stage dive into the free market and was caught, hoisted up by willing hands and tossed back on stage to a standing ovation. Google's IPO was for $85 per share in 2004, and by the end of that year the value per share was over $300. Today its stock price is around $607, but it's been quoted as high as $715.

In the first round of shares Facebook is hoping to raise around $10 billion.

At that price I wonder why Apple, Google or Microsoft doesn't just buy themselves a big stake in the company — Microsoft paid $8.5 billion for Skype last year and probably has reserves over $50 billion, and Apple is sitting on around $100 billion in cash right now — but it's a safe bet that those companies will be in the line to buy a chunk of Mark Zuckerberg's social networking giant anyway.

Why? Mainly to protect investments by using an ownership stake in Facebook to ensure the company continues to support their platforms and evolve with them — standard practice in the tech industry where even companies in hardcore competition own chunks of each other.

But these companies will also buy in because it's probably a good investment. Facebook is closing in on 900 million members and accounts for roughly one out of every four page-views on the Internet. They rake in one out of every 10 dollars in Internet advertising revenues and generated a billion dollar in profit last year on $3.71 billion in total revenues, a profit margin around 27 per cent.

You can access Facebook on every phone, every tablet, every video game console and a whole bunch of televisions. It works unbelievably well as chat software, as cloud storage for photos and videos, for managing your contacts, for advertising your event or business, for keeping in touch with the people in your life.

While everyone eagerly awaits the next big stage of the IPO — Facebook releasing its financial data in a prospectus for investors and figuring out a fair share price — it's worth examining the good, bad and ugly of taking your company public and what that could ultimately mean for Facebook and its members.

On the good side, $10 billion will probably fund a lot of innovation at Facebook, allowing for a lot more functionality and applications in the real world.

The bad side is the impact of having to answer to shareholders on an annual basis, and their constant calls for more and higher dividends. It means a greater focus on maintaining share price and posting steadily growing profits. It means quarterly reports, shareholder meetings, potential future battles for control over the direction of the company and exposing your company to the irrational, emotional and short-term thinking of the investor economy.

It means sharing information on salaries and opening your books to forensic scrutiny. It means changing your corporate culture and maybe eliminating all the perks that make your company great to work for because someone will decide that those perks are eating into profits.

The ugly is the worst-case scenario, and what could conceivably happen if shareholders aren't happy with the rate of growth or their dividends. They could force Facebook to ditch some low-profit features, to intensify advertising and member profiling, and to increase the sale of member data to other companies. They could change Facebook itself, getting rid of the "open" approach for exclusive deals with other companies to host their platform.

Just look at the pressure that Google is under these days to increase profits, and all of the promising projects that have been squashed because they don't add to the balance sheet.

And just look at all the investors in Research in Motion trying to sway that struggling company into different directions that might restore short-term profits and boost share price, but would destroy the company in the long term — some investors even want to throw in the towel completely and sell the company and its many valuable patents to the highest bidders.

The good news is that Zuckerberg owns about 28 per cent of the company and holds about 57 per cent of the voting power on the board. He'll lose some influence in the IPO, but should still be in a fairly secure position of power.

The reality is that Facebook had no choice but to offer an IPO. Through internal shares and investors, the company is already closing in on over 500 shareholders and legally would have to start publicly reporting with or without an IPO. Since that information is going public anyway, Zuckerberg concluded — and rightly so— that it made more sense to go the IPO route and generate some cash in the process.