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Social Network Service and Facebook Essay

1 . How does Facebook make money? What are the value drivers of its business? What is its comparative advantage relative to other social networking companies?

Advertising accounted for 98 per cent of Facebook’s revenues in 2009, 95 per cent in 2010 and 85 per cent in 2011. Facebook offered advertisers the opportunity to segment and target its users based on their demographic information, expressed interests and social connections. Another part of the revenue was generated by its payments business, which came almost exclusively from the sale of virtual goods used in social games sold through the online gaming company, Zynga.

Facebook’s value driver is dependent on how well they adapt to their ever-growing pool of competitors. Twitter is rising up as the most powerful social networking company with more and more users joining every day. It is becoming a household name alongside Facebook, Myspace and Linkedin, all three companies share a similar vision of the free flow of information. Facebook needs to keep its users happy by continuing to improve the website, while adding more applications in order to keep their users loyal and have easy accessibility to the network. Facebook currently has more then 500 million active users that have invested a lot of time and energy into building their friend and client networks. For some people, having these huge networks of users translates into money and marketing opportunities.

Because of this, it would take a big problem for people to start dropping Facebook. Users can access Facebook on their Smartphone’s, i-pods, i-pads and other devices. Facebook has been adapting to all new technology to sustain its competitive advantage and be known as the top social networking website. Facebook’s customers expect privacy. They want to know that their profiles and private information are safe from hackers, stalkers, and others that are looking to exploit their personal data. It is important for Facebook to uphold its practice of keeping users’ information safe and accessible to people according to their account settings. Users trust Facebook with their private information and this is mainly due to how long Facebook has been around providing user support and added security as necessary.

Facebook enjoys three advantages over rivals: technological capabilities, economies of scale in its infrastructure, and most importantly, network effects. Network effects favor Facebook because for  those who want to socially network, it makes sense to congregate on Facebook where everybody else is hanging out. There is only one square in the global village, and it is run by Facebook. Being on a different square from everyone else doesn’t get you anywhere — you just miss the party. This makes Facebook’s competitive lead, with over a billion users, a self-reinforcing advantage: the more people that are on Facebook, the less reason newcomers have to not be on Facebook.

2. Why is Facebook going public? What is the planned use of proceeds from the offering?

When the social media company’s stock starts trading under the symbol Facebook, the buyers demand is increase and become to expected to explore. At its initial offering price of $38 a share, the 8 years old upstart is worth $104 billion. That’s more than such giants as Disney and Kraft. The riches that will flow to the company and its early investors totally nearly 16 billions. As with any initial offering, Facebook’s IPO follows lots of negotiation. Such as the price, paperwork, selling and buying and so on.

So why is Facebook going so public? There are several dimensions. The most important thing is that all companies wants to make more and more money. The same reason many other fast-growing companies do is: to raise money. They will sell stock to the public gives companies money to run their business, expand and buy other companies. Sometimes companies go public even if they have no plans for money. Facebook says that it wants to establish a public market for its shares in case it needs to raise money from investors in the future.

Facebook intends to use the net proceeds of the offering for working capital another general corporate purposes. Facebook will not receive any proceeds from the sales of share by the selling stockholders. Facebook expects that the majority of the net proceeds Mr. Zuckerberg will receive upon the sale of shares in the offering will be used to satisfy taxes that he will incur in connection with his exercise.

Through an article, it reported that Facebook says it plans to the proceeds for working capital and general corporation and the principal purpose is to “create a public market ” for shares to allow us and their employees. Instead of spending the money on businesses, then, Facebook says it will invest the proceeds in money-market funds, certificates of deposits, Treasuries or cash.

3. What was transpiring in the US IPO markets prior to Facebook’s offering? What has been the performance of recent IPO’s(during the lead-up to the Facebook offering?

Before Facebook’s offering, based on the exhibit 5, the US IPO market was influenced negatively by the global IPO market which was with economic uncertainty and market volatility. More investors were not optimistic that resulted in the decrease of raised capital and declining number of IPOs since the first quarter in 2011.

According to exhibit 6 in the case, it shows the analysis of recent IPO by McNeil and his team. The IPO prices of both Linkedln and Groupon are higher than the initial price range. Furtermore, their price increase dramatically on the first day and that lasted one week. On the other side, Zynga’s IPO price was in the range. However, its IPO was not that successful. All of three companies’ IPO performances didn’t maintain well just after one month. Getting IPO was just the first step. It would be still a long way for them to keep sustainably profitable facing challenges ahead.

4. What is the intrinsic value of a Facebook share? How does this value compare to the price being discussed by the underwriters?

What is intrinsic value? Consider it the value that would be attached to an asset by an all-knowing analyst with access to all information available right now and a perfect valuation model. No such analyst exists, of course, but we all aspire to be as close as we can to this perfect analyst. Using discounted cash flow models is in some sense an act of faith. We believe that every asset has an intrinsic value and we try to estimate that intrinsic value by looking at an asset’s fundamentals. Every asset that generates cash flows has an intrinsic value that reflects both its cash flow potential and its risk.

The problem lies in the fact that none of us ever gets to see what the true intrinsic value of an asset is and we therefore have no way of knowing whether our discounted cash flow valuations are close to the mark or not. In this case study, the intrinsic value of a Facebook share is same as the estimated values / share in the spreadsheet Facebook IPO: $32.43. Facebook had filed its first Red Herring on February 1, 2012, but the underwriters did not go out to investors with a formal price range until early May.

At that time, the talk was in the range from the high $20s to mid-$30s per share. The amended preliminary prospectus filed on May 9 indicated that Facebook would sell 337,415,352 shares at a price between $28 and $35 per share. Despite such skeptical comments, on May 14 the lead underwriters had raised Facebook’s IPO range to $34 to $38, citing “overwhelming demand by investors.” At the same time, the number of shares being sold had been increased to 421,233,615 shares, with all of the additional shares being sold by Facebook insiders.

As we can see, the intrinsic value we calculated, $32.43/per share, was higher than the prices underwriters pronounced at first, but was below the prices underwriters announced in the end. That means the IPO of Facebook, at first, is worthy to buy. Finally, due to several reasons and news, such as the rise of usage, the IPO price was higher than intrinsic price. That means it’s not worthy to buy. However, there are some possibilities that intrinsic value we calculated is not correct: One is that we have made erroneous or unrealistic assumptions about a company’s future growth potential or riskiness. A second and related explanation is that we have made incorrect assessments of risk premiums for the entire market. A third is that the market is, in fact, making a mistake in its assessment of value.

5. As a potential shareholder what are your concerns about Facebook or its stock offering?

First of all, Zuckerberg controlled so many shares of Facebook that other investors, by contrast, could not play an important role on Facebook. Facebook had two classes of common shares, which were Class A and Class B. Class B, which was owned exclusively by Facebook insiders, was entitled bigger voting right. Zuckerberg would control over half of the votes. Hence, he was able to control the outcome of investors’ approval.

He could even disapprove a transaction which other investors supported. It is the worrying situation for the shareholder. And besides, Facebook’s IPO increased to $34 to $38, which made it the largest IPO of the year. But however, it may be oversubscribed! It is said that Facebook’s IPO was overwhelmed by too many investors. And then, its price became so high. We can conclude that it is hard for us to precisely value the price of the fast-growing companies like Facebook. Therefore, I need some methods to value companies such as DCF.

I can also compare it with other firms and recent transactions to make more accurate valuation.

6. What is your recommendation for the CXTechnology Fund?

CXTechnology wants to devote a great amount of money on the investment. But it is risky to create an investment plan on such fast-growing company. Facebook needs to face the competitors and other internet platforms. There are so many social networking site nowadays. Facebook might be defeated by others in the future. In addition to that, it had to increase its sales and management its costs. Moreover, overpaying for its stock was also a problem for the investors. Therefore, CXTechnology has to value precisely when funding. It also needs to obtained more data and  compare Facebook with other companies. Being discreet is always a primary principle for every investor.

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