471125045-Facebook-IPO-case-solution-v1-docx

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FACEBOOK, INC: THE INITIAL PUBLIC OFFERING Team members: Iván Neftalí Hernández Aguirre A00998895 Daniel Fernando Gargiulo A01531208 Joaquín Ochoa Herrera A01531230 Hanako Taniguchi Ponciano A00708169

Question 2.- Why is Facebook going public? What is the planned use of proceeds from the offering? According to Mark (2014, P.2), given the raising popularity and visibility of social media companies, the financial market thought that it was only a matter of time before Facebook went public. In February 2012, the underwriters circulated an initial Red Herring that announced the intention of Facebook to sell unspecifies amount of class A common stocks. According to the case paper elaborated by Ken Mark (2014, P. 2), the company based in Palo Alto, California, had the purpose to create a public market for the existing shareholders and to enable future access to the public equity markets through its IPO. The proceeds would be used for working capital and other general corporate purposes. Question 3.- What was going on in the U.S. IPO markets prior to Facebook’s offering? What has been the performance of recent IPOs? Facebook’s IPO was moving forward during an improving (but fragile) global economic environment. Facebook decided to launch its IPO when the global economy was still recovering from the global financial crisis that started in 2008 with the fall of the banking industry, which by 2010 led an important part of Europe to a sovereign debt crisis. Although the American economy was slowly recovering (GDP forecast grow by 2.2% in 2012, up from 1.7% in 2011), the unemployment levels remained above 8% and the GDP was still below the 3.3% annual average from the 1980s and 1990s. Moreover, presidential election in the US threatened to derail the recovery and the picture abroad looked no better with Europe falling back into a recession while emerging market economies of China, Brazil, and India (BRICS) showed signs of faltering. Opposite to the economy, the stock marker was in a strong shape by May of 2012, and S&P 500 Index raised 21% compared to November 2011. However, this lasted only couple of weeks. Because of the global economic situation, investors turned bearish, and by mid-May, the index fell 5%. The NASDAQ 100 Index rose 17% between mid – December 2011 to mid – May 2012 but stayed there with no signs of movements upwards. The continuing economic uncertainty and market volatility had left the global IPO markets in stagnation. “During the first quarter of 2012, global IPO activity fell to $14.3 billion, down significantly from $46.6 billion during the first quarter of 2011.” (Mark, 2012, p. 5) In the middle of this context, three other digital companies decided to launch its IPO: LinkedIn, Groupon and Zynga, with mixed results.

 LinkedIn, the success story: Issued 7.84 million shares in May 2011, at $45 each for gross proceeds of $353 million, which resulted in a firm valuation of $4.3 billion. The social network that focuses on professional networking and career development (Business Insider, 2019) had increased its price talk from a range of $32 to $35 to a range of $42 to $45 on the day before the pricing. On the first day of trading, LinkedIn shares rose by 109% and closed at $94.25- Over the following year, the shares kept rising to $110.56 and obtained a total gain of 146%.  Groupon, what goes up, must come down: The digital coupons provider, Groupon, went public in November 2011 and raised $700 million “in the largest U.S. tech IPO since Google” (Mark, 2014, p.5). Due to a strong investor demand, the underwriters increased the number of shares offered from 30 million to 35 million and had priced shares at $20, above initial range of $16 to $18. This resulted in a $12.7 million valuation for the company that barely was three years old when it launched its IPO. Although Groupon’s share rose 43% the first of trading, by mid – May the stock price fell to $12.17, a loss of about 39%.  Zynga, born weak: Zynga, the online gaming company launched its IPO in December 2011 and sold 100 million shares at $10 per share. Although the deal was priced at the high end of the price talk of $8.50 to $10 and valued the company at $7 billion, the share price fell by 5% on the first day of trading. By mid – May, the shares were trading at $8.56, 14.4% below its IPO price. Question 4.- What is the intrinsic value of a Facebook share? How does this valuation compare to the price talk from the underwriters? According to the price reached during a private deal posted on SharePost, the share of Facebook had reached $44 before the IPO, which was based on an income approach (DCF) and market approach (Comparable companies and recent transactions). However, professor Aswath Damodaran calculated an intrinsic value of a single Facebook share at $32.44 based on the Discounted Cash Flow (DCF) analysis. A disadvantage of the method used by professor Damodaran is that it is very sensitive to the assumptions used. The price talk from the underwriters had a significant variation from February, when the Red Herring was first filed to May. In February 2012, the talk was in range from $20s to mid - $30s per share. An amended prospectus filed on May 9 – few days after the underwriters launched a roadshow – indicated that Facebook would sell 337,415,352 shares at price between $28 and $35 per share. Couple of days after the prospectus was files, CNBC reported on May 11 that Facebook’s IPO was “many, many” times oversubscribed. Although not everyone was convinced by this comment, on May 14, the lead underwriters had raised Facebook’s IPO range to $34 to $38,

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