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Facebook Case Study Essay

EXECUTIVE SUMMARY

A firm that has been floating on the stock exchange has been selected and evaluated and the firm I have chosen was Facebook. In my report I have included the recent history of Facebook as to how the social networking site started and the developments from the introduction until recently.

I furthermore went on to evaluate the source of finance with a brief explanation as to what source of finance is and the different type of sources available to business i.e. Short term , medium term and long term. This explains the type of finance business need starting from day to day transactions to long term purchasing of assets and investments.

After my understanding of what sources of finance are, I done some research on Facebooks source of finance and came to a conclusion that the firms sources of finance is long term source of finance as they earn money through shares(IPO).

The reason for Facebooks floatation was simply because at the time they decide to go public the firm was already valued as one of the top companies around, however even though the firm was highly valued there was still negative stories about the firm.

Facebook continues to grow and to try and keep the 200 million users entertain there are now talks of a Facebook phone that is due to be released this year.

INTRODUCTION

I am required to select a firm that has floated on the stock exchange in the last 4 years analyse and critically evaluate the firms decision to go public. The firm I chose was Facebook and in my report I will be discussing the following about the firm.

Recent history of the company

The firms sources of finance/ Capital structure of the firm

Reason for flotation

Implications of the flotation

Performance of shares since flotation

Future prospects for the firm

Recommendations as to the future financing

ABOUT FACEBOOK

Facebook is a popular social networking website whose name originated as a nickname of directories handed out to university students that aided in them getting to know their fellow students.

The social networking site was invented by Harvard computer science student Mark Zuckerberg, along with a few class mates. Facebook officially started off in October 2003 when Zuckerberg launched “Facemash.com” to allow visitors to compare pictures of two students and say who’s hot and who’s not. The website became popular as people enjoyed going on the internet and checking out pictures of their friends.

In January 2004 an article in the Harvard Crimson stated that Zuckerberg registered the Facebook.com domain as he was now inspired by the success of Facemash. Shortly after the launch of Facebook the website eventually grew as it was now discovered by Sean Parker (Former Co Founder of Napster) who informally advised the student on what to do, and by June 2004 Facebook received its first private investment from Peter Theil [http://www.youtube.com/watch?v=ROrUea0gLlY], the founder of PayPal who gave $500 000 in exchange for 10.2% of the company. Sean Parker later became president of the newly incorporated company Facebook.

Facebooks domination continued to grow until it became the second most visited web property online. In August 2009 Facebook acquired the real time new aggregator site friends feed and in 2012 Facebook made a huge splash in the market by acquiring instragam for approximately $1 billion.

This year Facebook has introduced a graph search to help users find out more about their friends and connections. This feature lets you search through data shared by friends to discover people their interest, restaurants, much and much more. This is the first major step Facebook has taken towards competing with Google.

SOURCES OF FINANCE

Business needs money to support investment and finance their day to day activities. A company may choose to raise money internally (by retaining and investing profits) or externally.

Each source of finance has a risk attached to it, the risk that the business will not meet the financial commitments related to the source. The mix of all the financial sources is known as the financial risk of the company. An essential requirement in raising finance is that business should meet repayments and other expenses, as the fall due. This is generally achieved by ensuring that there is a good match between _cash inflow generated by the use of money and cash outflows to the service payments to the finance raised_.

TYPES OF SOURCES OF FINANCE.

Short term finance- Usually needed for a business day to day operations e.g. paying wages, ordering suppliers etc

This is usually the cheapest one to use as it is easier for a lending institution to asses lending risk for shorter loan periods. Types of short term finance include the following:

Overdrafts

Short term loans

Trade credit

Accrued expenses and deferred income

Factoring

Medium term finance- This source of finance can be used to finance the acquisition of Motor Vehicles, Machinery, Computers, etc. Three main types of medium term finance are:

Hire Purchases

Leasing

Term Loans

Long term finance- In financing the purchase of a building (major investments), long term finance would be appropriate. There are two alternative methods of raising long term finance

Debt-Bank loans and Bonds

Equity-is an important source of long term finance and consists of: Preference shares, Ordinary Shares and Retained Profits (internally generated cash flow).

Equity finance is raised through the sale of ordinary shares to investors and can be raised either via:

A new share

IPO ,Placing or Introduction

A rights Issue.

FACEBOOK’S SOURCES OF FINANCE/CAPITAL STRUCTURE.

Facebook’s source of finance is the long term finance as the firm makes its money through sale of ordinary shares from investors such as IPO (Initial Public Offer) which is the first offering of shares to the general public.

The social networking site officially filed for an IPO on February 1 2012. The preliminary prospectus declared that Facebook was seeking to raise $ 5 billion in investment at the time the company announced that they have 845 million users active on the site with close to 2.7 billion likes and comments daily.

After the IPO, Mark Zuckerberg planned to retain 22% ownership stake in Facebook with 57% of voting shares which was valued by the underwriters as being worth $38 each and pricing the company at 104 billion, the largest valuation ever to date for a new company going public.

Facebook selected Morgan Stanley as the lead advisor for the IPO as the company had earlier lead the IPO of internet giants like Group on, Zynga and other banks such as Goldman Sachs, Bank of America Merril Lynch,Barclays Capital and JP Morgan.

According to AllFacebook , shares have been actively trading between $25-$40 which gives Facebook a valuation of approximately $17000, more than Microsoft which was valued at $15000.Most of Facebooks trades takes place through secondmarket a company responsible for generating a market around typically illquid assets while while the value of the trades is unkown.While Facebook stock is not the type of thing you can trade in a day due to the fees and time involved in transactions ,however most investors see a great return in just 6 months.

BELOW IS A GRAPH WITH FACEBOOKS SHARE PRICE IN MAY 2012 WHEN FACEBOOK DECIDED TO FLOAT.GRAPH 1.1

REASON FOR FLOTATION

The reason for Facebook’s flotation was due to the fact that the company’s IPO was valued as one of the best amongst top companies.

When Facebook made its long expected debut as a public company, the social networking company linked up with the largest public companies in the world alongside Mc Donalds , Amazon.com and Bank of America. The wall street journal reported that Facebook was prepared to file initial paperwork for an offering that could raise as much as $10 billion.

As the news about Facebook spread worldwide and it later became the most popular and influential global website, Investors now started to flock to acquire shares in Facebook.

Articles stated that even though Facebook was valued a high price there was still a debate within business and media circles on the true value of the company. The social networking site also made money through advertising allowing other companies to advertise about their business on the website.

In May 2012 Mark Zuckerberg and other executives began a road show to persuade institutional investors to buy shares before the flotation. One of the underwriters JP Morgan along with Goldman Sachs and Morgan Stanley were included in the road show.

IMPLICATIONS OF THE FLOATATION FOR THE FIRM

Even though there is a great amount of effort in the flotation of Facebook there are still some negative views on the social site. An article in the guardian called “_Facebook flotation: three reasons to avoid it”_ it states that Facebook is not worth $100 billion and that Zuckerberg has not put a price tag on his creations so it’s still early to say that he will attempt to achieve that amount when the flotation started.

Below are the three reasons given in the article:

Zuckerbergs first letter to the potential investors was a strange dispatch. As it stated that Facebooks ambition was to build a service that gives people the power to share and help them once again to transform many of the core institutions and industries.

Facebook has no need to float as it does not need to invest as the firm is profitable and generates enough cash to pursue its current objective.

Zuckerberg is keeping control of Facebook by adopting a dual voting structure with him and investors.

In response to the negative publicity about the website , Facebook opposed by saying that the main reason for floating is to allowing longstanding investors to cash in a portion of their winnings and to help Facebook grow. The float promoters were then seeking to emphasize that the investments obtained were potentially for a profitable growth and to play down the risk faced by the firm.

PERFORMANCE OF THE FIRMS SHARES SINCE FLOATATION

Zuckerberg has called the stock performance “disappointing”. The social networking leaders stock has lost nearly half its value since flotation. More than $50 billion has been cut off Facebooks market value as the companys shares have fallen from $38 to $19.43. The CEO has lost the most as the value of his facebooks holdings falls more than $9 billion which questioned his skeptics and guess his ability to lead a company.

The performance of the shares has obviously been disappointing and has caused some demotivated employees, however Zuckerberg motivated them and they believed that things will improve as time goes go on.

After numerous up and downs and significant critics from the public the share prices started showed a highly volatile behaviour with prices as low as $17.73. The prospective performance of the company did not impress the investors and therefore had a impact on the company as a whole.

In November 2012 Facebook shares has shown a significant rise in value reaching the highest price in months, As the value it continued rising the company witnessed an increase of 15% each month to date.

The major factor that has pushed the social networkings markets performance is the increase in investors’ confidence in the companys potential to earn a higher revenue in the prospective periods. The confidence is directly linked to the increasing success of the performance as the number of business advertising on the website increased which means higher revenue and higher revenue means higher returns for investors.

FUTURE PROSPECTS FOR THE FIRM

Facebook has and always will be the king of the social media sites , as the site is still growing worldwide. To date the social networking website has more than 200 million registered users.

Researchers believe that Facebook can evolve another google as they are also relying on advertising for their revenue.

The social networking sites goal now is to create a personalized digital newspaper through the newsfeed that has everything a person would want to know about people. This will be perfectly customized just for the users.

Mobile will be the key to Facebooks future growth said the head of advertising as only 30% of users access through desktops and 70% through mobile devices every day. A plan to invest a huge amount of money will be the target for Facebook in the future as talks on creating a Facebook smartphone continues.

Facebook is also targeting other continents like Asia, Latin America and Africa as users in these areas have grown by 33% each year.

Even though they introduce the mobile device Facebooks ultimate goal will still remain to get more users online and to improve current features that will keep current users entertained.

CONCLUSION /RECOMMENDATION TO THE FIRM’S FUTURE FINANCING

Facebook is available to everyone all over the world and there still huge potential for growth for the firm.

My recommendation to the firm regarding their finance would be to focus on their advertising model, improving it and allowing business to advertise more on their website. By doing that they will do enhance their chances of doing better than search engine giant Google and revenue will increase which will benefit both the firm, current and potential investors. With the introduction of the new Facebook phone they have to ensure that the phones are better then other smartphones. Facebook has to earn the general publics confidence in them by coming up with new ideas on their IPO, if the public is satisfied they will invest more in the company. However with the introduction of the new phone I believe share prices will increase.


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