Facebook IPO Hype (Essay Sample)

Facebook IPO Hype by (Name) Course Professor Institution Date Facebook IPO Hype Facebook is an online platform that enables content creators to share with users from around the world. Primary sources of value for the company’s business operations include consistent improvement of content packaging practices. This essay will provide an overview of the generic benefits and drawbacks of going public, explore the motivations behind Facebook’s decision to go public, assess the reasons why Facebook find it easier to raise more capital from stock markets as compared to taking debt, among other pertinent issues as it regards to the decision of Facebook undertaking Initial Public Offer. According to Khurshed (2011), a company should get listed on the stock exchange to issue securities to raise money from the public. Facebook made an IPO with the Securities and Exchange Commission (SEC) in 2012, with a share price of $38. Going public occurs when a company practices an IPO by selling shares of stock to the public. Companies opt to go public by offering IPO to raise equity capital from the public through trading platforms. There are various pros and cons to a company going public through an IPO to raise money from the public as discussed below. Some of the benefits of going public are discussed herein. The first benefit of going public is access to capital. After the IPO, companies have access to a large pool of capital, as they can sell their shares and raise funds from external investors. Secondly, going public leads to greater liquidity for the company. Going public provides liquidity to the shareholders in the form of an active market where the shares can be sold. Enhanced reputation is yet another benefit of Facebook going public. Going public increases the visibility and credibility of the company which is an advantage in business dealings. Going public also increases employee Incentives. Public companies offer stock options to their employees to incentivize them to achieve the company's objectives. Despite the many benefits of the company, Facebook going public, there are many drawbacks of Going Public. Some of the generic drawbacks of going public are Greater Disclosure Requirements which demand that all public companies have to disclose a significant amount of information regarding their business activities and financial performance. This disclosure comes with its costs which the company must shoulder yearly. Secondly, share Dilution is another major drawback (Siddaiah, 2011). Public companies need to sell their shares to the public, leading to share dilution, which can result in a reduction in earnings per share. The parties which are affected most by share dilution are the shareholders of the company who expect to earn huge returns on their investments. Regulatory Oversight is another drawback of any company going public. Public companies need to comply with various regulations set forth by the Securities and Exchange Commission (SEC). Failure to comply with all sets of standards and guidelines, the companies risk the danger of being sued and incurring extra expenses that may have not been planned for and which otherwise will lead to a significant reduction of their profits. Going public leads to the loss of control. Public companies are required to have a board of directors that oversees the company's activities. Equally, the initial public offer makes companies incur other extra charges such as underwriting charges, legal fees, tax costs, accounting costs and registration fees remitted to the Securities and Exchange Commission ( Bellin & Thomason, 2023). Various factors could motivate a company to go public. The primary reason that could have made Facebook go public was the SEC's legal requirements. According to the SEC, a company with assets exceeding $10 million and over 500 shareholders should get listed on the stock market. Facebook was required to go public in the year 2012 and thus had to get listed. Facebook also had to go public to raise additional capital to invest in the research and development project. Facebook's growth rate had slowed, and the company needed to raise funds to fund new initiatives such as mobile ad revenue, expansion into emerging markets, and acquisitions. The IPO would allow Facebook to raise capital from a large pool of investors, providing the company with the necessary funds for growth and expansion. Facebook had several avenues to raise funds, but the company decided against raising its capital from equity financing as a result of diverse considerations. Facebook chose to go public and issue equity rather than take on debt financing to raise capital because of the following reasons. Facebook was a young company then with limited cash flows and assets, making it difficult to obtain significant debt financing. Secondly, Facebook's growth was risky and unpredictable, making it challenging to pay back the debt. Moreover, Facebook faced significant competitive pressure from other internet giants such as Google, who could easily match or outstrip any debt financing Facebook could raise. An Initial Public Offer was a suitable choice for Facebook since it allowed the company to raise funds without taking on debt. An IPO would highlight Facebook's value proposition and attract investor attention, allowing it to raise funds from a wide range of investors. According to Brigham and Ehrhardt (2016), the choice of raising capital depends on the circumstances under which the company operates. Considering Facebook’s situation mentioned in the case, the IPO is the most suitable source of financing compared with other avenues. Facebook intended to use the capital raised from the IPO for a range of purposes, including technology infrastructure, acquisitions, and working capital. It's reasonable to invest some portion of the IPO proceeds in financial securities, such as government bonds, to provide a level of security to the investors. However, companies should exercise prudence and avoid such investments with a high level of risk. Facebook filed its IPO prospectus with an initial goal of raising approximately $6.8 billion in Class A common stock, which was later increased to $10.6 billion. However, the actual amount raised was $16 billion. This amount includes both the primary offering to the public markets and the secondary offering before the IPO. Class A shares were offered to the public through the IPO, with the primary purchasers of these shares being large institutional investors, such as hedge funds and mutual funds. Facebook's dual-class share structure gives more voting rights to Class B shares held by founders and insiders, which can limit the power of new investors through Class A shares. An IPO overallotment (Greenshoe) option is an option given to the underwriters of an IPO where they can sell additional shares of the company's stock to the public at the IPO price. Initially, Facebook launched an IPO offering 421 million shares for $38 per share, amounting to $16 billion. However, the total shares raised through the greenshoe provision were 484 million, implying that it raised about $18 billion from the IPO offer. The greenshoe provision allowed them to offer 63 million additional shares from increased stock demand. Therefore, Facebook raised $18 billion from the IPO offer, and not $16 billion. Facebook included an overallotment option of up to 63.18 million shares in its IPO. IPO lock-up agreements are contracts that limit the ability of insiders, founders, and other major shareholders from selling their shares in the company for a particular period. Facebook's IPO lock-up period was 180 days, which means that insiders, founders, and other major shareholders were not allowed to sell their shares in the company for 180 days after the IPO. Over-allotment or greenshoe options give the underwriters the mandate to trade more shares, up to 15% of the total shares on offer from an existing shareholder or the issuer at the same price and under the same terms as other shares in the IPO offer for up to 30 days (AMT Training, 2016). According to Khurshed et al. (2007), underwriters play a crucial role during the IPO offer process. They agree with the company to administer the issue of common stock to the public. The key tasks executed by the underwriter include: determining the company's value, advising the company on the best offering price and issuing shares, marketing and distributing the company's shares to potential investors and creating a syndicate of underwriters to share the risk for the offered shares. According to Logue et al. (2002), there are many primary considerations when selecting an underwriter. An underwriter should have a good reputation, based on market experience, IPO, and after-service activities. A good reputation would boost the selling of the securities and better pricing in the short term. An underwriter should also have a good understanding of the market. This includes knowledge of various institutional, individual and retail investors to create demand for the IPO (Measeneire and Divakaruni, 2012). Primary considerations when selecting an underwriter are: reputation and credibility, underwriting fees, the underwriter's experience in the field of the company going public, the underwriter's network and reach in the investment community and finally the proposed plan of action and overall management of the IPO process. The involvement of multiple underwriters is motivated by the need of improving the prospectus of the proposed IPO offering. The prospectus would become more attractive to potential investors when well-known and prestigious underwriters are involved, such as Bank of America, Barclays, JP Morgan and others (Facebook IPO Prospectus, 2012, pp. 162). The main motivations for syndication are: to share the underwriting risk with other banks, to increase the capital raised by offering more shares to the market, to leverage the ex...