Questions and Answers on Blockbuster Facebook IPO:

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The Facebook IPO: A Blockbuster Event

A groundbreaking moment in the history of social media is underway as Facebook, a company that originated in a Harvard dorm room in 2004, prepares for its highly anticipated initial public offering (IPO). With a staggering valuation of $104 billion and a capital raise of nearly $16 billion, Facebook’s IPO is capturing the attention of investors, analysts, and the general public alike. However, taking a company public is a complex process that involves negotiations, paperwork, and strategic decision-making. In this article, we will delve into the questions surrounding Facebook’s IPO and shed light on its significant public debut on TheRockie.

Going Public: Why Facebook Takes the Leap

Like many rapidly growing companies, Facebook’s primary motive for going public is to raise capital. By offering shares to the public, companies secure funds to expand their operations, pursue acquisitions, and solidify their financial standing. In Facebook’s case, the IPO aims to establish a public market for its shares, enabling the company to raise additional funds from investors if needed in the future.

The Mechanics of an IPO

During an IPO, a company sells ownership stakes to the public for the first time. Facebook plans to sell up to 421 million shares, representing a 15 percent stake in the company. This sale is expected to generate an impressive $16 billion in capital.

Stakeholders in the Facebook IPO

Currently, the ownership of Facebook shares is primarily held by well-connected investors, employees, and key insiders such as company directors. In the IPO, these stakeholders are offering 241 million shares, more than half of the total shares being sold. At the IPO price of $38 per share, these early owners stand to pocket a substantial sum of $9 billion, averaging around $230 million each, while the company itself will receive $7 billion.

The Pricing and Selling Process

In an IPO, there are two sets of buyers involved. First, investment banks, known as underwriters, collaborate with the company to file IPO documents and determine the share price through engagements with pension funds, mutual funds, and other institutional investors. Facebook’s IPO benefits from the involvement of 33 banks, with Morgan Stanley leading the way. These underwriters guarantee the purchase of all shares at the IPO price, assuring the company of the necessary capital.

Before public trading commences, the underwriters buy the shares from the selling stakeholders. This purchase occurs after negotiating a price with a second group of buyers, typically institutions. For Facebook, this negotiation settled at the IPO price of $38 per share, falling within the estimated range of $34 to $38 per share specified in regulatory filings.

The Market Debut and Trading of Facebook Shares

The negotiated IPO price becomes the official price at which the shares are offered to the public. However, underwriters deduct a commission, typically around 3 percent, for their services. In Facebook’s case, this means the underwriters, including Morgan Stanley, pay $36.86 per share, retaining $1.14 as a commission. They have five days to transfer the remaining funds to the company and other selling stakeholders.

Following this process, the underwriters sell the shares to institutional buyers and select individual investors before public trading begins. This sale typically occurs on the night before the stock exchanges open. For Facebook’s IPO, it is expected that all the underwriters’ shares will be sold by Friday morning, just before trading commences at 9:30 a.m. in New York.

Understanding Facebook’s Market Value

The market value of a company represents the collective perception of investors regarding its worth if all shares were actively trading. In the case of Facebook, the company is projected to be valued at $104 billion after the IPO, based on an IPO price of $38 per share. This valuation places Facebook above established industry heavyweights such as Disney and Kraft.

Key Players in the Facebook IPO

Several notable investors and firms are participating in the Facebook IPO. DST Global Ltd., founded by Russian investor Yuri Milner, invested in Facebook in 2009 and plans to sell 45.7 million shares, potentially earning $1.74 billion at the IPO price. Early investor Reid Hoffman, co-founder of LinkedIn Corp., is expected to sell shares worth up to $36 million. Goldman Sachs, which invested in Facebook in the previous year, stands to gain as much as $1.1 billion from its shares.

Mark Zuckerberg’s Role and Share Sale

Facebook’s CEO, Mark Zuckerberg, intends to sell 30.2 million shares, potentially earning him up to $1.15 billion. It is noteworthy that part of Zuckerberg’s holdings includes special shares that grant him voting rights on shareholder proposals. After the IPO, he will retain 56 percent of the voting power.

The Facebook IPO: Historical Significance

In terms of capital raised, the Facebook IPO is set to become the third-largest IPO in U.S. history, surpassing AT&T Wireless, which raised $10.6 billion in 2000. The title of the largest IPO belongs to Visa Inc., which raised an impressive $17.8 billion in 2008.

The Facebook IPO represents a monumental moment for the company and the technology industry at large. As the company goes public, it aims to secure additional resources for its future growth and expansion plans. The market’s response to the IPO and the subsequent performance of Facebook’s shares will undoubtedly shape the company’s trajectory and influence the broader landscape of social media and technology.

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