An interesting company to consider from both corporate structure and valuation perspectives is Facebook Inc. The social networking company was originally created by Mark Zuckerberg in February 2004, and operated out of his dormitory room while he was a student at Harvard University. Other major initial investors / stakeholders included Zuckerberg’s colleagues at Harvard University (Dustin Moskovitz, Eduardo Saverin and Chris Hughes), and the business was developed through investments from a number of venture capital / angel capital investors (Accel Partners, Peter Thiel, Jim Breyers, Greylock Partners, Meritech Partners and Li Ka-Shing), and a number of leading corporations (Digital Sky Technologies, Microsoft and Goldman Sachs). In 2006, Facebook received acquisition offers of $750 million from Viacom and $1 billion from Yahoo!, which were rejected by Zuckerberg. Microsoft purchased a 1.6% stake in the company for $240 million in 2007 (notionally valuing Facebook at $15 billion), and Digital Sky Technologies paid $200 million for a 2% stake in 2009 (giving Facebook an implied value of $10 billion). Up to now, the company’s primary source of revenue is from advertising on the Facebook platform, with sales revenue and net profit of $7.8 billion and $1.5 billion respectively for the 2013 financial year, compared with $5 billion and $32 million in 2012 and sales of $3.7 billion and net profit of $668 million in 2011. Mark Zuckerberg has been the CEO of Facebook since its inception, with a number of his Harvard University colleagues initially holding key executive positions. In 2009, the company instituted a dual-class stock structure which was designed to ensure that company control would be retained by these early investors, and that Zuckerberg, himself, would retain voting control of the company. On February 1 st 2012, Facebook filed for an initial public offering (IPO) with the Securities and Exchange Commission (SEC). The announcement indicated that its executives and early investors are selling 484.4 million shares in the IPO at an indicative offer price range from $34 to $38 per share. An offer price of $38 per share will result in the Facebook IPO raising $18.4 billion, making it the second-large US IPO of all time after Visa Inc. in 2008, and value the whole company at $104 billion. Mark Zuckerberg was selling 126 million shares as part of the IPO, which would leave him with 22% overall ownership of Facebook, but 57% ownership of the voting shares. Before the Facebook IPO, the company’s shares were being traded by some investors on a secondary market platform, SharesPost, with the last traded price prior to trading ceasing in March 2012 being $44.10 per Facebook Inc. share. The issue underwriters settled on a final issue price of $38 per share and Facebook Inc. shares listed on the NASDAQ exchange on May 18 th 2012, with the share price reaching $45 in early trading before closing at the end of the first trading day at $38.23 per share. The Facebook Inc. share price initially declined after first listing and reached its lowest level of $20.01 on August 20 th 2012, however, the current price is $68.46 as at March 3 rd 2014.

Questions:
1) Based on the information above, what was the business structure of Facebook Inc.
prior to undertaking the IPO process?
2) Outline what you think the likely reason(s) were for Facebook Inc. to undertake the
IPO listing in 2012 on the NASDAQ exchange.
3) Based on the information provided above, which of the following prices do you
think is likely to be most reflective of the true intrinsic value of Facebook Inc. around
the time of the IPO transaction ($44.10 traded price on the SharesPost secondary
market, the IPO offer price range of $34-$38 determined by the company, the $38 issue price determined by the offer underwriters or the $38.23 closing price on the
first day of trading).

Answer rating: 100% (QA)

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