ND Expert: Brilliant IPO strategy by Facebook

Author: Shannon Chapla

Timothy Loughran

Facebook yesterday (Feb. 1) filed its plans to raise $ 5 billion in an initial public offering (IPO) of stock, and University of Notre Dame Finance Professor Timothy Loughran, a recognized IPO expert, calls it a “brilliant move.”

“Facebook has had numerous opportunities to go public since its founding in 2004,” Loughran says. “Delaying the offering until now has ensured that investors will pay top dollar. I think it was a brilliant move by Facebook managers to delay the offering until much of the uncertainly relating to their business model has evaporated.”

Loughran shared the following reaction to Facebook’s S-1 filing:

• “Facebook has annual revenue of only $4.39 per active user. That is a surprisingly low number. Right now they have 845 million active users. If it gets 3 billion active users (a hard to imagine number), keeping the assumption of $4.39 revenue for each user, Facebook would have revenue of only $13.17 billion. Facebook needs to find more ways to get revenue from its users.”

• “Assuming a market value of $100 billion, Facebook would trade at a price- to-sales ratio of 27. That strikes me as a bit expensive given that Facebook already has a sizeable percentage of the earth’s population as active users.”

• “Given a float of only $5 billion, I would guess that they could be a very hot IPO in terms of first-day returns. Investors demand in the IPO might be huge. $5 billion is not much to spread around to both retail and institutional investors (regardless of the offering price).”

• “The $5 billion float will create a scarcity of shares once the firm goes public, thereby raising the market value. Further, their low float should make it hard to short the shares (since relatively few shares will be public). I would imagine Facebook having a follow-on offering after the IPO. Follow-on offerings have lower gross spreads and leave less money on the table compared to IPOs. Having a follow-on offering would enable institutional players to take more meaningful positions in Facebook.”

• “Management has clearly learned the lesson of the values of diversification. They have both Democrats (Bowles) and Republicans (Ullyot) on their board of directors. Management clearly wants to keep both parties happy.”

Notre Dame’s C.R. Smith Professor of Finance, Loughran’s work has been published widely in the top journals of the field, including the Journal of Finance, Journal of Financial Economics, Review of Financial Studies and Journal of Financial and Quantitative Analysis. His research areas include the long-run performance of new issues, payment form in corporate acquisitions, value versus growth investment strategies, and the relationship between a firm’s location and its liquidity and capital structure.

Contact: Loughran, 574-631-8432 or Loughran.9@nd.edu