Friday, February 3, 2012

‘Like'-ing IPOs

So you want to buy shares of Facebook with their Initial Public Offering (IPO)? Good luck. An IPO is where a private company or closely held company, like Facebook, offers shares to the general public for the first time and that stock is then traded on a stock exchange. Friday’s ‘All Things Considered’ on National Public Radio did a great job of explaining how IPOs work and why companies go public in their article “Facebook’s IPO and the Average Investor.”

When a company goes public, it works with an investment bank to price shares of its soon-to-be issued stock and to decide how many shares to issue. The initial price is a combination of science and art. The science is calculating the value of the company including potential future income (part art), and the real art is forecasting what investors will pay for the stock.

Investment banks will sell large blocks of stock from the IPO to its best customers. These are usually large institutional investors and their high dollar customers. The average person can only purchase shares when intuitional investors and high dollar customers start trading their shares in a stock exchange. This means we have to wait until after the IPO to purchase shares.

Most companies go public with an IPO to raise money for expansion and growth. The company could also go public to cash in on the company’s value and distribute it to the shareholders. It is estimated that that the valuation of Facebook will be in the neighborhood of $100 billion and according to the Washington Post, expects to raise as much as $5 billion in the IPO. This means that Mark Zuckerberg, founder and CEO of Facebook could hold as much as $28.4 billion of Facebook stock after the IPO.

Facebook is almost forced to go public because of Security and Exchange (SEC) rules on how many stokeholds (500 shareholders of record) a company can have before it has to issue disclosures as a public company. Facebook is at that point where it has to issue these reports and since they have to issue reports, they may as well go public.

What will Facebook do with the $5 billion it raises? Only time will tell- $5 billion is an incredible amount of seed money. We also wonder if Zuckerberg will change his Facebook status from 'Private' to 'Public' at the time of the IPO.

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