Facebook IPO

News broke yesterday that Facebook filed for an initial public offering that could value the popular social networking site between $75 and $100 billion.  These astronomical valuation statistics make Facebook the biggest Internet/technology IPO ever witnessed.  The 150 page S-1 filing with the Securities and Exchange Commission (SEC) details Facebook as a company with 85% of revenues coming from advertising.  Facebook's revenue was $3.7 billion last year, an 88% increase over 2010.  Profits were reported as $1 billion.

Founder Mark Zuckerberg stands to benefit immensely from the unprecedented IPO.  He owns 28% of the company, but Zuckerberg plans to take a $1 per year salary beginning in 2013, similar to what Steve Jobs did while calling the shots at Apple.  Now 27, Zuckerberg started Facebook from his dorm room at Harvard University in 2004, a story which was popularized in the movie "The Social Network".  Today, Facebook has over 845 million users.

Several bulge bracket investment banks are involved in the IPO, although Morgan Stanley took the lead underwriting role.  Goldman Sachs, Bank of America, Barclays Capital, and JP Morgan also added consulting and valuation services.

Investing in Facebook presents both risks and potential gains.  Relative to other tech company IPOs, the magnitude of Facebook is unheard of.  2011 saw the IPOs of LinkedIn, Pandora, Groupon, and Zynga, all of which leveled off after the first day of trading.  If the Facebook stock has a chance of doing as well as Google, it must produce higher profits and margins.  Several questions still should keep investors skeptical:

-What will the IPO offer price be?
-What are Facebook's future growth rate?  Already at 845 million users, when does the growth begin to level off?
-How does Facebook plan to enter the Chinese market?

Reports indicate that Zuckerberg will retain control over the company after it goes public.  He has proposed to go public with a dual-class share structure.  Public shareholders will have the option to purchase Class A shares that have one vote each.  Zuckerberg and current Facebook employees and investors will hold Class B shares that have ten votes apiece.  His control over Facebook could increase in the future as other Class B shareholders sell their stake in the company.  Zuckerberg isn't the first tech company CEO to use this structure to retain control over the business.  Google founders Larry Page and Sergey Brin implemented a similar share structure when the tech giant went public in 2004.

Zuckerberg hopes to attain the best of both worlds.  He wants to be free of shareholder influence while still receiving the benefits of equity and capital that go along with being a publicly traded company.  In addition, Zuckerberg appears to more concerned about the future well being of the company than the stock price.  In a letter to potential investors, Zuckerberg wrote:

"Facebook was not originally created to be a company.  It was built to accomplish a social mission-to make the world more open and connected.  Facebook aspires to build the services that give people the power to share and help them once again transform many of our core institutions and industries.  We don't build services to make money; we make money to build better services."