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Facebook IPO creates tech giant

Social network site valued at $104b as trading starts today

By Michael B. Farrell and Hiawatha Bray
Globe Staff / May 18, 2012
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Here comes Facebook Inc., the $104 billion social network.

In its highly anticipated initial public offering, Facebook sold 421 million shares at $38 each on Thursday. The offering generated $16 billion for the company and its private shareholders in the third-biggest stock debut in history.

The social network is now more valuable than Ford Motor Co. and General Motors Co. combined. The stock sale sets Facebook’s market capitalization at $104 billion. On Friday, shares begin trading on the Nasdaq Stock Market under the symbol “FB.”

Facebook increased the number of shares it planned to sell by 25 percent Wednesday, due to what analysts say has been overwhelming demand.

The Facebook offering trails ­only Visa Corp., which went public in 2008 to raise $17.8 billion, and the Italian utility Enel SpA, which earned $16.4 billion in 1999, according to Renaissance Capital, a Greenwich, Conn., firm that tracks IPOs.

The new shares were being sold by early investors such as Goldman Sachs and venture capitalists like Accel Partners . “This is an opportunity to ring the register,” said Shawn Kravetz, president of Boston-based hedge fund Esplanade Capital.

David Menlow, president of IPO Financial.com, a company that tracks new public offerings, said that at $38 per share, Facebook is definitely overpriced.

“Is it worth this much? No,” Menlow said. He said that if the stock doesn’t skyrocket in early trading, many disappointed investors could pull out and force it below its opening price by Friday afternoon.

Menlow is confident aboutFacebook’s long-term value as an investment. “I think you’ve got some incredibly brilliant people working at this company,” Menlow said, and predicted that they would develop new services that would generate a surge of revenues.

But a host of financial analysts are skeptical about the benefits to investors.

Josef Schuster, founder of IPOX Schuster LLC, a Chicago firm that trades in new public offerings, said that the recent sell-off on Wall Street makes Facebook shares far more risky than just two weeks ago.

“I think investors are in for a rough ride [Friday],” said Schuster. “It may rise, but I think the stock may react to 10 days of falling markets. I wouldn’t be surprised if Facebook closed flat on the day, or even lower.”

The decision to offer more shares, gives a larger group of investors a chance buy into the company, said William Sahlman , a Harvard Business School professor.

As an iconic brand of the Internet age, with more than 900 million users worldwide, “Facebook is something that almost everyone might want to have a piece of in their portfolio,” Sahlman said.

Web companies that have gone public, such as Amazon.com Inc., debuted on Wall Street with values that were said to be overblown at the time, according to Sahlman.

“Yes, [Amazon] was overvalued in 1997, but if you bought it in 1997, you did OK” in the end, he said.

Some investors and analysts question Facebook’s prospects for growth; growth in revenues in particular. Nearly all of the $3.7 billion in revenue the company earned last year came from online advertising, but Facebook faces serious competition in that arena from search giant Google Inc., among others.

At least one major advertiser will continue to use Facebook, but only for posting its own content. GM said this week it will stop advertising on the social network because it hasn’t proven to be an effective platform for paid ads, according to Pat Morrissey, a spokesman for the auto maker. The company has a big Facebook fan following and lots of content on the site, but, Morrissey said, “we have not been getting what we want from our advertising.”

Although “Facebook still has to prove to many advertisers its value,” according to Catherine Tucker, associate professor of marketing at the Massachusetts Institute of Technology’s Sloan School of Management, it will soon have the resources to pursue new opportunities.

With the money from the IPO, Facebook will be able to make major improvements, said Melissa Parrish, an analyst with Forrester Research in Cambridge.

“The potentially unbelievable amounts of cash will allow them to address some pretty important things,” Parrish said. “I think we are going to see them make smart use of the money.”

Michael B. Farrell can be reached at michael.farrell@globe.com.

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