Facebook IPO Harvard Case Solution & Analysis

Facebook IPO Case Solution

Facebook is a social networking site which was created by Mark Zuckerberg on February 4, 2004. Facebook wanted to raise money by issuing IPO on May 18, 2012. It was biggest the IPO took place in the history of the United States. Mark Zuckerberg and other shareholders of IPO were aware that by issuing IPO, their ownership will be diluted with other equity holders of Facebook, which would create the dilemma of capital structure and equity dilution.

Following steps are taken when a company decides to go Public:

An initial public Offering (IPO) is the sale of private company’s stock to public. Small or large companies issue shares in order to expand their capital. In an IPO, the underwriter provides assistance and helps to determine what type of securities to issue at best offer price. Another method of underwriting is commission based, which depends on the sales of the stock, as higher sales would generate more cash.

 An IPO should be “Registered” with Security Exchange Commission (SEC). The company files a registration statement, which includes a prospectus and it is reviewed and analyzed by SEC staff. The prospectusincludes description of the company, type of IPO, price offerings terms and conditions and other information, which investors require regarding thebuying and sellingof stocks. Moreover, the prospectusis distributed to all those investors who participate in IPO.

The next step is “Going on the roadshow” in which the team’s managers look for the people who are interested in IPO. In addition to this, the road show includes live presentation to investors including institutional investors. If anyone wants to invest in an IPO, then the underwriters make reservation and price offers to those particular investors.

After the roadshow, the next step is “Finalizing the IPO”, in which investors ask the SEC to declare the registration statement so that the purchase of stocks take place. This last step takes place when the shares start to trade in the stock market, and underwriters and other executives decide how much each investor will receive the number of stocks at a defined price in the prospectus.

Risks associated with IPO: The Company may expand without having to borrow and paying interest expense, however it involves the risk of an increase in ownership dilution and distribution of wealth to other owners as well, and another reason is the conflict which may occur when there are differences in ideas.

Facebook's capital structure before the IPO:

Facebook decided to issue the shares publicly initially by IPO in order to raise the capital and to capitalize market share. Facebook’s IPO was the largest IPO in Internet and the history of the US, which was filed with SEC on Feb 1, 2012, and IPO, which took place on May 18, 2012, which includes 421,233,615 shares at the price of $ 38 per share. Facebook’s net revenue was increased by 65% in 2011 as compared to 2010 and it got845 million active users monthly and 483 million users at the end of Dec 2011.....................

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