Why Go Public?: Understanding a Facebook IPO

Why Might Facebook Want to Go Public

So as we continue to research and evaluate an investment or a trade in the likely 2012 IPO of Facebook, we should look at some of the reasons why the company would go public in the first place. Why would a private company like Facebook, founded in 2004, go through all the paperwork, expenses, and regulatory hassles to become a publicly traded company? Let’s consider a few reasons.

Achieving Status

After years as a leader in social media, the transition to publicly-traded company would be an important milestone for Facebook. It could potentially help other partner companies, vendors, users/clients, customers, and advertisers see the company in a whole new light. An IPO can imply continued growth for Facebook, and perhaps it signals that they aspire to start a new chapter in a development of the company. Trading on a major US exchange — possibly NYSE [ticker: NYX], but more likely NASDAQ [ticker:NDAQ] — would also bring the attention of analysts, the press/media, and Wall Street at large, with the added clout of stock (incentives/options, tax benefits, and retention).

Cashing Out

Sometimes an IPO signals that the founders, principals, management, and core employees want to cash out their personal equity stakes in the company, and finally receive a windfall for all their time, effort, and risk. This doesn’t mean that CEO Mark Zuckerberg will completely sell his shares and leave — but as we speculated before — many other early Facebook employees might consider themselves too wealthy to continue working day-to-day.

Raising Cash

An IPO is a great way for the company going public to raise cash. It’s not a loan or a line of credit, it’s a huge injection of money right into Facebook that can be used for new initiatives, paying off debt, pursuing ambitious growth strategies, attempting mergers and acquisitions, and other plans. Of course, a growing web 2.0/3.0 social media tech company will likely not pay a dividend, but new funds (~$5-10B!) do open up many new possibilities for Facebook.

Increasing Overall Liquidity

And of course, cash brings more cash. Having money from an IPO makes it easier for companies to leverage up and borrow even more – making a whole range of loftier goals possible. Banks prefer lending to established companies – and publicly-traded companies always seem more established. New goals for even more resources could include larger takeovers, massive new projects involving significant research and development, and more.

As much as it’s possible that some early employees will cash out and leave Facebook, there is always a concern that not having publicly-traded stock, options, and equity incentives will eventually make other talented employees continue with their career and move on to a company that does offer those benefits. Facebook’s own private stock options program seems to have been quite generous in the early years, but those shares are harder to liquidate unless they’re listed on an exchange. In addition to the retention of some important employess, Facebook’s IPO would give them a very valuable tool for new hires. Some all-stock (no cash!) acquisitions are possible as well because the current, public value of the Facebook stock could be “as good as cash” for many of their targets — hopeful of the company’s prospects and the stock’s future value.

Of course, IPOs are expensive, and the necessary SEC filings are complicated, but Facebook has had time to prepare for this initial public offering. Rumors of an impending Facebook IPO have surfaced in each of the last few years.

Some things to consider when you ask yourself: should I buy the Facebook IPO?