Facebook Ipo Valuation
SGMT 6050 – Mergers and Acquisitions
Facebook IPO
Facebook, a social networking site, has grown at an exponential rate that far surpasses market expectation, so much so that its growth rate is referred to as the “ Facebook phenomenal”. In 2004, Facebook had 1million monthly active users, and in comparison, it had reached 845million monthly active users in 2011. This phenomenal led to one of the biggest initial public offerings (IPO) the market had seen in recent years, with total capital raised to be valued at $16B, given the $38 per share offering price. Facebook was valued at around $96.6B in total. Prior to the IPO, the market perceived the valuation with positive approval signaled by both Facebook’s private market share auctions and analyst’s reviews. However, as it will be examined below, Facebook has been significantly over-valued by the underwriters. In addition, the market changed its opinion of Facebook shortly after the IPO, criticizing the valuation of the company was too high. The differences in market reaction showcase shortfalls in valuation, and it is recommended that analysts and Facebook should have used real option to valuate its market value.
Over-valuation
There are three main reasons why Facebook is overvalued at $38 per share.
Aggressive Assumptions made by underwriters The first reason is the $38 per share price is based on overly aggressive assumptions made on Facebook’s future revenue. Facebook generates its revenue in two ways - display advertisements on its website and retain royalties from third-party developers for using Facebook’s online payment platform. Out of the two streams of revenue, advertisement accounts for about 82% of the total revenue, and royalty payment only accounts for 18%. Lead underwriter Morgan Stanley, has justified its pricing based on the assumptions that Facebook’s revenue will grow moderately considering the increasing popularity of its mobile app. Morgan Stanley estimated Facebook revenue to
Facebook IPO
Facebook, a social networking site, has grown at an exponential rate that far surpasses market expectation, so much so that its growth rate is referred to as the “ Facebook phenomenal”. In 2004, Facebook had 1million monthly active users, and in comparison, it had reached 845million monthly active users in 2011. This phenomenal led to one of the biggest initial public offerings (IPO) the market had seen in recent years, with total capital raised to be valued at $16B, given the $38 per share offering price. Facebook was valued at around $96.6B in total. Prior to the IPO, the market perceived the valuation with positive approval signaled by both Facebook’s private market share auctions and analyst’s reviews. However, as it will be examined below, Facebook has been significantly over-valued by the underwriters. In addition, the market changed its opinion of Facebook shortly after the IPO, criticizing the valuation of the company was too high. The differences in market reaction showcase shortfalls in valuation, and it is recommended that analysts and Facebook should have used real option to valuate its market value.
Over-valuation
There are three main reasons why Facebook is overvalued at $38 per share.
Aggressive Assumptions made by underwriters The first reason is the $38 per share price is based on overly aggressive assumptions made on Facebook’s future revenue. Facebook generates its revenue in two ways - display advertisements on its website and retain royalties from third-party developers for using Facebook’s online payment platform. Out of the two streams of revenue, advertisement accounts for about 82% of the total revenue, and royalty payment only accounts for 18%. Lead underwriter Morgan Stanley, has justified its pricing based on the assumptions that Facebook’s revenue will grow moderately considering the increasing popularity of its mobile app. Morgan Stanley estimated Facebook revenue to
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