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Companies go public for many reasons but the two that are most common are: 1) to raise capital for further expansion, and; 2) to secure the wealth of the founders. Some companies go public for different reasons, like Microsoft’s IPO back in 1986 that was literally forced by excessive secondary trading of company shares. Gates and Shirley decided to accept the burden of going public because it wasn’t all bad, but they didn’t seek it because they didn’t need the money.
Neither does Facebook.
SEC rules say that once a company has more than 500 shareholders it has to file the same financial disclosures as any public company, which is a pretty big administrative burden and a real hit to company privacy. It’s not the size of the company (look at Koch Industries as an example of a huge company that’s still very private) but the number of shareholders.
Conventional wisdom says that if you have to file all the same reports as a public company does you may as well sell some shares, raise some money, and give your kids an inheritance worth fighting over. And that’s why companies in Facebook’s position nearly always have an IPO.
But there’s more to an IPO than just filing papers and accepting money from underwriters. There’s a management roadshow where executives run around the country pitching their stock to institutional investors. And there’s the need to accept whatever valuation the market places on your company post-IPO. Even if you only sell a small percentage of your company to the public, that percentage is used to value everything else, as social game developer Zynga knows to its recent chagrin, having gone public only to see its value drop.
It’s this last paragraph that is important to Facebook and why I think the company will forego an IPO, at least for 2012. The roadshow is a huge distraction and can be humiliating for executives (that would be Facebook founder Mark Zuckerberg) who have to answer every question, no matter how intrusive or ill-informed.
Then there’s that valuation, which everyone thinks will be around $100 billion, but what if it isn’t? Zynga has made the market nervous about social networking IPOs and LinkedIn’s $6 billion valuation with 100+ million members makes 800+ million member Facebook look more like a $48 billion company to me. That’s close to Facebook’s recent valuation for private placements. I don’t think those recent investors want to see the value of their holdings go down.
Facebook is a profitable company with $3.5 billion in cash so it doesn’t need more money absent some huge acquisition that I don’t think is coming and could probably be used to back into going public if one did happen. Zuckerberg, for all his geeky brilliance, risks being crushed or screwing-up the roadshow. He has plenty of money, too (remember that $100 million he gave away last year?), and no heirs to fight over it.
The company has long forged its own course and I think they’ll do so this time, filing the proper SEC reports but not going public in the traditional sense. There is simply too much at stake and too much to lose.
As longtime Ohio State football coach Woody Hayes said of passing the ball, “only three things can happen and two of them are bad.”
Once Facebook has changed its reporting status and the market comes to understand what’s happening, they can quietly start selling shares almost anytime, but probably not in 2012.