Saturday, January 8, 2011

Facebook's Initial Private Offering

As investors enjoy their second straight January with positive brokerage statements in the mail, there's more than a whiff of optimism in the air. The Dow Jones Industrial Average is on course for its biggest two-year bull run since 1932, and individual investors are finally showing signs of getting back into stocks. The period Dec. 1 to Dec. 29 saw a total of $14.90 billion move out of bond funds and $5.51 billion into stock funds.
The appetite for risk is back. For better or worse, people are ready to get in on the next hot play. America, after all, has always been a place where investors could ride the good fortunes of its most innovative companies. Hasn't it?
In 1995 the locus of innovation was Web pioneer Netscape Communications, whose initial public offering ignited five of the most lucrative years in market history. In 2004 it was Google (GOOG), whose "Dutch auction" IPO invited anyone to bid on a share price; those who bid over $85—small and large investors alike—got in on what has turned out to be a 618 percent return.
Today, the It company is Facebook, the seven-year-old social network that last summer bagged its 500 millionth active user and whose founder and chief executive officer, Mark Zuckerberg, was named Time's Person of the Year for 2010. When a privately held company displays this level of innovation and enjoys this level of success—when it captures the public imagination to such a remarkable degree—it's only natural that investors want to own a piece of it. Secondary exchanges such as SharesPost have been trading insiders' shares of Facebook at a level that values the enterprise at $42 billion. A Facebook IPO would benefit insiders and investors alike; all the 26-year-old Zuckerberg needs to do is reserve the ticker symbol—FACB? FRND?—and say the word, and the wealth-creating magic of democratic capitalism would unfold.
It isn't unfolding, however—at least for now. In what feels like a profoundly unfriendly move for a company with 500 million friends, Facebook has struck a private deal with Goldman Sachs (GS) and Russian investment firm Digital Sky Technologies (which is full of Goldman veterans) to sell them a $450 million and $50 million stake, respectively, in the company. A preferred and limited roster of Goldman clients would also buy in to the tune of about $1.5 billion. The deal, which values the social network at $50 billion, or more than two Yahoo! (YHOO)s, is expected to be structured by Goldman to allow Facebook to remain below the 500-investor threshold that would force it to make an array of Securities and Exchange Commission disclosures. A special Goldman fund with numerous client investors, the legal thinking goes, could be counted as a single investor.
Some funds within the wealth management division, such as the hedge fund Goldman Sachs Investment Partners, are also likely to get some of the private Facebook stock, according to two people familiar with the matter who requested anonymity because they weren't authorized to discuss the deal. Clients are being offered the opportunity to invest as much as $2 million apiece with Goldman taking a 4 percent placement fee and 5 percent of any investment profits plus an annual servicing fee, according to two clients who were offered shares. "If you're an underwriter, you love this kind of discretion," says Jay R. Ritter, a University of Florida professor who studies public offerings. "It gets you the maximum pay-to-play benefit."
The structure of the deal is also novel. While Goldman Sachs routinely distributes offerings to its institutional and high-net-worth brokerage clients (minimum account size: $10 million), interested buyers this time would have to agree to hold on to their shares until 2013 and keep a lid on material nonpublic information. Stephen Cohen, a Goldman Sachs spokesman, declined to comment.

As for as, my point of view is concerned, I would Facebook will not sustain for long. The investment in facebook is like a buble, which may vanish anytime. In social websites, there is very short life time, we saw the boom of 'orkut', its no more used by anybody. Likewise, no body is sure that Facebook will remain in the world.

In addtion, the hatered against Facebook in Muslim world is also a concern becuase it has hosted the Cartoon contest of Prophet PBUH.

Best of luck Facebook!!