By Xavier Forneris.
I’d like to talk about a subject that has intrigued me for a long time: What is the real worth of Internet businesses? After all financial valuation was designed in the pre-internet era for “brick and mortar” businesses, i.e., very different “animals”.
One way to answer this question is to look at IPO’s involving Internet businesses.
Google (NASDAQ: GOOG) set the bar high with its 2004 IPO that raised $1.9 billion and valued the company at $23 billion. Today, Google’s market cap is a massive $202 billion.
The first or one of the first social networking companies to go public was LinkedIn. Everybody was watching that flotation as a bellweather for the sector. LinkedIn’s IPO on May 19, 2011, was extremely successful, with an initial price of $45 a share, valuing the company at around $4.25 billion, around $1 billion higher than initial estimates. One day later the stock price had doubled, increasing the overall valuation to a whopping $9 billion overnight! Today, Dec.7, 2011 the stock (NYSE ticker: LNKD) closed at $74.26, well above its initial offering price, giving LinkedIn a market cap of $7.16 billion.
In early November (11/03/2011), Groupon, the discount-deal company, did an IPO with a $805 million float on NASDAQ (GRPN). The stock started to rise but has lost about 20% of its value in one month.
Does this mean that LinkedIn’s valuation was tactically “low-balled” to then exceed expectations? And does it mean that Groupon’s valuation was too optimistic?
Other Social Media IPO were complete disasters. Renren’s stock (RRN) lost 80% of its value in just 7 months, between May 5 and December 7, 2011. And the FriendFinder Networks (FFN) stock dropped more than 90% during the same period. Their shareholders are probably not as happy as LinkedIn’s shareholders.
Now, it has been reported for a couple of weeks that Mark Zuckerberg who was known to be reluctant about floating Facebook is “warming up to the idea”. Although the exact timing and scope of a flotation are still unclear and no final decision made, rumour has it that the CEO/founder would be leaning toward an IPO between January and April 2012 that might raise $10 billion and would value the company at about $100 billion, about half the size of Microsoft whose current market capitalization is about $206 bn. Not bad for a social network started in 2004!
The $10 billion IPO, if confirmed, would be among the largest involving a US company (only 3 US companies had an IPO over $10 billion: AT&T Wireless Services, GM and Visa Inc.). It would definitely be the largest for any Internet or technology company.
Zuckerberg has been criticized for keeping Facebook private for too long. As mentioned by The Wall Street Journal (11/29/2011), companies often consider an IPO when they reach $100m in revenue. Far above this mark, Facebook now has close to $4 billion in revenue.
Listed companies have significant and strict financial disclosure obligations, one reason encouraging companies to remain private. The interesting twist here is that Facebook, even without an IPO, would have to publish its financial information in a few months, as soon as it will have more than 500 shareholders (SEC requirement). That is likely to happen about April 2012, which may be a factor behind the IPO consideration. Without an IPO, the company would have the obligation of disclosure but without the benefit of raising additional capital.
Another interesting fact is that on November 29, Facebook has reached a settlement with the Federal Trade Commission (FTC), the U.S. regulator, that had brought a number of charges against the company’s privacy practices. The FTC found that Facebook had “deceived” users by sharing personal data with advertisers in spite of a pledge to give such data private. I had not made the connection between that and the IPO until I read The Economist. The U.K weekly explains that the agreement removes an obstacle and clears the way for the anticipated “blockbuster flotation”.
The Wall Street Journal, Nov. 29, 2011
The Economist, Dec. 3, 2011