Facebook's Initial Public Offering - An IPO Case Study
Facebook IPO Case Solution
Based on previous data, the company was using debt to raise the funds in its capital structure from 2007 to 2011, which includes common stock outstanding of about $615,000 in 2010 and 2011. In addition, its debt increased through all years from $140,000 in 2009 and reached to $812,000 in 2011.
Facebook often generates enough cash to finance its operations, however it did not require financing or issuing equity.
The debt ratio of the company was 50.75%, 56.42%, 38.30% and 29.23% from 2008 to 20011 respectively.
In addition to this, the decreasing trend shows that company is trying to change its structure by issuing equity more and less debt financing in order to capitalize its funds (Ferret).
Facebook changed its capital structure as it wanted to go public without losing the voting power and weakening the ownership structure. However, stock price crashed 50% just after a few months of IPO due to the overvaluation of stock whichresulted in the stock loss of $50 billion on August 2012.
The company took more than a year to trade the stock at $38 otherwise it was trading in between $25 to $ 35.
Facebook’s capital structure after the IPO:
Although the company had endless private money supply however,it decided to go public because of the condition set by SEC of not having more than 500 investors until and unless it is publicly traded.
Facebook generated a huge amount of cash than any other social media website with 800 million active users that showed the power of generating revenue.
Facebook had enough cash to meet the requirement of working capital in 2010 after whichit decreased in 2011, which iswhy the company decided to change its capital structure by issuing IPO. The company required more cash to meet the requirement of working capital.
Facebook used little debt and helda lot of cash in its cash balances and after thatin the year 2012, the company decided to issue 77.83% equity and 22.17% debt to finance its capital structure(Pratik, 2015)
After the IPO many lawsuits were charged and along with this, the estimated revenue decreased because of new mobile advertising business, which was communicated to large investors only and that lead to a loss as many investors backed off from the IPO while large investors had huge profits against the company.
On the trading day, due to high stock trade in NASDAQ’s electronic platform, the stock open was delayed because of high volume and the stock price was in decreasing trend and many wanted to sell stocks and faced bigger losses when the trade actually passed through because of delay.
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Due to the lawsuit of the ad business, the stock price was trading below $38 per share, and it was trading in the range of $25-35 per share till August 22, 2012. In addition to this, after that day, the stock price started to increase and on April 15, 2014, it reached to $58 per share.
Facebook is incorporated as one of the leading social websites of the world.
Its market capitalization is $241.74 billion as on July 24, 2015, and it is the 12th largest company by capitalization in the world. Its market capitalization is ten times larger as compared to its competitors (i.e.
Twitter and LinkedIn Corporation whose market capitalization is $23.79 billion and $28.35 billion respectively) (Investopedia, 2015)…………….
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