Facebook IPO Might not be the Smartest Thing After Groupon's Failure
posted Tuesday Nov 29, 2011 by Nicholas DiMeo
It's like we're living the dot-com bust over again and the addage that history repeats itself really is true. Months before some analysts started to doubt the Groupon IPO, we predicted its demise right on our show. As it would turn out, we were right. Groupon's IPO for $10 billion, initially, worked like a champ, however investors have dumped almost all of their stock just as fast as they bought it up. Shares fell from just over $31 to half of that at $16 at the time of this writing. The stock has even seen a low of just under $15, bringing the company's valuation to under $10 billion and leaving no hope for them in the future, or any other Internet company for that matter. Investors are now afraid of the Internet yet again and the financial industry is in shock as if they have no clue why this didn't work. At least Groupon is one of the few companies with a business model.
With all of that being said, now would be a bad time for another company to try and start an IPO, right? Zynga would be wise to stay out of that mix for the time being, so it only makes sense that Facebook thinks now's the perfect time to shoot for a $100 billion valuation and $10 billion in an IPO, and that's not a typo.
While the ones who aren't blind and naive to the reality of what Facebook is and what it's going to be (or what it won't be) in a few years sit and shake their heads in confusion and doubt, those who have just discovered the Internet in the past few days think this is a brilliant idea.
Facebook, who has somehow managed to amass $1.6 billion in revenue in the first half of 2011, has decided to stay the course and try for an IPO some time before June 2012. The paper filing should be complete by the end of the year. So far, there is no word on which banks will have their hands in the pot, but analysts think Goldman Sachs being in the picture will help propel Facebook's efforts. The company purchased a large portion of Facebook for $1.5 billion in January.
Fortunately, there are some on the sane side of the fence still and think now probably isn't the best time for this to occur. Stevan Savage of Geek 2.0 is one of us.
This is a bad climate for an IPO for a couple reasons. For one, it's still a lousy economy. Secondly, a lot of people are looking at IPOs not as a long-term investment but rather a short-term investment. Just look at Groupon.
Charles King, analyst at Pund-IT also seems to agree.
Groupon is a good example of what can happen when the market realizes -- after the IPO -- that a company's competitive position will be considerably more complex and less advantageous than originally assumed.
Obviously, there's a couple of reasons why Facebook would want to still continue with this endeavor. First, there are a lot of employees who signed on with Facebook after 2007, when the social media company enacted a clause in which employees cannot sell or trade shares they receive until the company goes public. Along with that is the fact that with as many employees as Facebook has, the company has a lot of overhead and obviously could benefit from a quick surge of cash to sustain themselves moving forward. If our prediction of Facebook not being around by 2014 is correct, now would be the only time they have left in order to try and get some value on what they've created.
At the end of the day, the market is very fickle when it comes to Internet companies. Twitter is baffling us by getting insane amounts of cash in the private sector and seem to be pretty happy, but Facebook is a little different of an animal, as it has several other companies meddling in it by means of app connecting and social integration. Can they pull this off and be successful or will they fail? They could even pull a "gotcha" and back out of this thing at the zero-hour. We'll see as we get closer to June.