Facebook: an IPO in the coming weeks, a recent acquisition, and the issue of valuation

By Xavier Forneris

In my Dec. 8, 2011 post on valuation of internet businesses I talked about the possible Facebook IPO, noting that the IPO might raise $10 billion, which would value the company at about $100 billion (about half the size of Microsoft). Since then, two major developments occurred: first, Facebook confirmed its intention to go public. And second, Facebook made a major acquisition which gives us an interesting insight into Facebook’s potential value. In early April, Facebook bought Instagram, a photo-sharing service, for $1 billion . And since it was not an all-cash deal, Facebook had to give Instagram a price for its own stock, which apparently was about $30 per Facebook share. That share price would value Facebook at “only” $75 billion. However, in a very interesting piece, the New York Times  (Business section, April 19) wrote that, as part of the acquisition negotiations, the companies discussed a possible Facebook valuation of $104 billion. This is consistent, and even slightly above the analysts’ estimates which I mentioned back in December when the Facebook IPO was a growing -but yet unconfirmed- rumour on Wall Street and in Silicon Valley. This higher valuation is also consistent with what Facebook is said to have traded for on the secondary market (up to $40 a share).

The actual IPO, expected in May, will reveal whether Facebook’s valuation is closer to $75 billion or $104 billion. In a way, either value would be quite remarkable for a social network that started in 2004 and only had $3.7 billion in revenue and $1 billion in profit last year….Regardless of the exact amount, it is safe to assume that there will be more questions about the methods and multiples used to value internet businesses as well as more talks about the “next internet bubble”.