Facebook, Inc: The Initial Public Offering Harvard Case Solution & Analysis

Facebook, Inc: The Initial Public Offering Case Solution

Introduction:

Facebook was launched by Mark Zuckerberg and his friends in 2004 with the key objective of connecting people online. Facebook has a record of rapid growth which drastically improved its financial position. From a journey of database of 1 million monthly active users in 2004, it reached a figure of 845 million monthly active users and 522 million daily users. The purpose of this case is to provide a proper algorithm for valuation multiples used by Facebook to incorporate a positive financial growth.

Sources of Revenue:

Facebook generates 85% of its revenue from the advertising sector. This is done as there are more likes on an advertisement, then as a result it increases the revenue of Facebook. Facebook uses a database that is used by advertisers to target the users having similar interests required in selling or buying of product or service. The database compelled from the information uploaded by users enclosing their interests, preferences and identities. Facebook analyzes this information in connection with friends of users and it is known as social context.

Other revenues generated by Facebook are from its online payment business. These come from virtual goods offered by online games and buying of virtual goods, which resulted in the company generating a revenue of $557 million in 2011. Facebook has collaboration with gaming portals to enhance its sales of virtual goods.

Recently, Facebook initiated its mobile application, which affected its revenues, as a result another source of revenue was made for the company.

The value drivers:

The key component for the success of Facebook’s business model is to start with a successful roadshow. The roadshow would come up with a publicly announced presentation of figures of increasing user interactions on Facebook. Moreover, Facebook should influence the investors by showing them the amount of profit it would generate if more users join.

The case identifies Underwriters as another value driver, which would influence Facebook’s business model. Underwriters always have an influence on investors by recommending them perfect investment options. The acquisition of Instagram can lead Facebook to a major conflict for its initial public offering. Underwriters play a major role in resolving the conflict by putting maximum efforts on discussing the benefits of the acquisition of Instagram.

Other approaches that help in the success of the business model as reality,not a dream are Market Multiple Valuations and Discounted Cash Flows. It is important for Facebook to increase its growth rate of revenue, increase its growth of operating income from operations and growth of revenues from mobile users. The increase in the growth rate of cost of revenues should also be minimized by Facebook. Facebook should also compare its target range of price with other competitors.

The values of discounted cash flows are good for short term investor. In addition to this, Facebook gets its revenues from mostly of advertisement. Moreover, it is expected to increase online advertisement in the near future.

Motivations for Facebook Inc. to go public

Facebook is on its path of rapid growth. In just eight years, the company has attracted 845 million monthly users and recorded revenue of $3.7 billion. After IPO, the worth of Facebook is expected to be $100 billion. The figures make it one of the largest IPO by a social networking company. The consolidated financial statement of Facebook highlights some of its major reasons and motivations to go public.

Facebook stated that the initial public offerings are for its investors to craft their equity stakes into cash. Facebook rapidly introduces a variety of innovative online tools, as well as it has an additional advantage of public enterprise while getting loans from financial institutions for its innovations. Moreover, it will also able to get more funds by issuing more stocks. Facebook can also look for other mutual funds.....................

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