16 May 2012

The Great Facebook IPO

In the last few days one of the main things dominating the Business news pages is the Facebook IPO. For me the similarities with the failed Reliance power IPO seem to keep jumping up to say, "Those who fail to learn from history are bound to repeat the same mistakes".  

1) IF successful, this would cause it to break IPO records. 

Reliance Power attracted $27.5 Billion in opening bids creating IPO records. However, by the end of the first day it was trading at a 17% discount of the issue price. In the days to follow it only worsened to the extent that Reliance ended up issuing bonus shares. However, for stock that listed at Rs 450 and was rumoured to hit 800 - 900 on listing day, it has never gone above list price.

Facebook announced that it has increased the number of shares on offer and the price band and is looking at a valuation of close to a $100 Billion. This is insane when looked at along with #2

2) No Revenues really

Facebook has been trying to capitalize on its huge user base. Industry friends say that the Ad rates are horribly expensive.The general sense was people advertise once and don't see the response. They increase ad spending hoping based on the marketing team telling them they need more to make an impact. But with weak pull thoughs they eventually stop. While I have no evidence of this and it is mainly hear say, GM just annouced that it would stop its FB ad spending.

The same was true of Reliance power. They wanted money to fund their new projects. There were no underlying existing assets. There were only assets that were going to be built.  

3) Talk of windfall gains is drowning out the possible negatives

Given that Facebook net income is valued at $3 Billion with a profit of $1 Billion, it seems strange that it can command valuations of $100 Billion. If everyone is talking about selling it at 1.5 to 3 times the listing price on listing day, who is going to buy?

It seems like the Emperor might be walking around without his new clothes. But is it true and is anyone willing to say so?

Links
More on the Reliance Story on Wikipedia
Reliance to list at Rs 800 - 900
What actually happened to Reliance

Facebook targets a valuation of over $100 billion
Facebook revenue valuation
General Motors pulls the plug on Facebook advertising