Facebook IPO- Astounding Anticipated Valuation Based Largely on Size of User Base


By: Jared Sorin

The much anticipated Facebook IPO is nearly upon us.  After months of speculation, Facebook finally filed a registration statement on February 1st that will, if and when declared effective by the SEC, allow Facebook to undertake its initial public offering of its common stock.   The company, eight years old and the world’s largest social network, seeks to raise $5 billion.  The capital to be raised represents a mere 5% of the company’s estimated enterprise value of $100 billion.  Assuming this astounding valuation holds, Facebook will be valued at four times Google’s valuation when it went public back in 2004 at a (comparatively) “measly” $23 billion valuation.  It also will debut as one of the world’s most valuable business enterprises.

The Facebook registration statement revealed some previously unknown facts about the company.  For example, Facebook had revenues of $3.7 billion in 2011 and net income of  $1 billion.  It also boasts 845 million active users.  That user base undoubtedly is the primary rationale for a valuation that otherwise would be unsupportable and unsustainable by traditional valuation methodologies, such as those dependent on revenues and earnings.  Given the demand and the hype, while there is a strong likelihood of a highly successful IPO, only time will tell if the lofty valuation expectations will be sustained.

Ironically, another Internet giant, Yahoo, has set its sights on a piece of the Facebook prize.  In a move that could threaten Facebook’s proposed IPO, Yahoo asserts that Facebook has appropriated several of Yahoo’s patented technologies.  While Yahoo has yet to place a monetary value on the patents allegedly infringed upon it is seeking to force Facebook to license the intellectual property from Yahoo.

Perhaps we will see a war among Internet titans, with Yahoo, valued at $18.1 billion, taking on Facebook, perhaps valued at $100 billion.




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Fordham Journal of Corporate & Financial Law