Analysis of Facebook Corporation's Initial Public Offer

Facebook Corporation
Corporate Finance Assignment
Initial Public Offer Analysis
Name of the Author
University Name-

Table of Contents
Introduction.................................................................................................................................................3
Task-1..........................................................................................................................................................4
Answer to question no-(1).......................................................................................................................4
Advantages of IPO of Facebook Corporation...........................................................................................4
Pitfall associated with the IPO of Facebook.............................................................................................4
Motivation to go Public...........................................................................................................................5
Task-2..........................................................................................................................................................5
(A) Why was it relatively easier for Facebook to raise capital from the stock market over the debt
funding?...................................................................................................................................................5
Task-3..........................................................................................................................................................6
IPO prospectus, Facebook provides information on the ‘Use of proceeds’. What is your view on how
Facebook planned to use the capital raised from the IPO? Should Facebook invest IPO proceeds in
financial securities?.................................................................................................................................6
Should Facebook invest its IPO proceeds in its financial securities?........................................................6
Task-4..........................................................................................................................................................6
Task-5..........................................................................................................................................................7
(A) Class A shares offered to primary shareholders...........................................................................7
(B) Dual class share structure............................................................................................................7
Task-6..........................................................................................................................................................7
(A) Key tasks executed by Underwriters............................................................................................7
(B) Primary consideration while selecting the underwriters.............................................................8
© The main motivation for the syndicating the underwriting.................................................................8
Task-7..........................................................................................................................................................8
(A) Investors dislike outlook revision during IPO of Facebook.........................................................8
Task-8..........................................................................................................................................................9
Assess Facebook’s issue price ($38) in light of the valuation data and parameters provided in the case
within DCF (Discounted Cash Flow) and CCA (Comparable Companies Analysis) techniques. Briefly
evaluate the valuation performed by Prof. Damodaran in Exhibit 17 of the case study.........................9
(B)Evaluate the valuation performance by Prof. Damodaran (Exhibit 17)...............................................9
Task-9........................................................................................................................................................11
The diagram below shows the performance of Facebook shares from May 2012 to November 2017.
The first day of public trading of Facebook shares was 18 May 2012. Shares were sold in the IPO at an

offer price of $38. More information on daily share price movements is available in the Excel file (FB
share price)............................................................................................................................................11
Share price analysis...............................................................................................................................11
Task-9........................................................................................................................................................13
In the light of the main theories of capital structure, provide a discussion of the evolution of the
capital structure of Facebook since its IPO............................................................................................13
Evaluation of the Capital structure of Facebook since last five years....................................................13
Conclusion.................................................................................................................................................14
References.................................................................................................................................................14
Appendix...................................................................................................................................................16

Introduction
With the ramified economic changes, each and every company should follow proper
capital structure. In this report, proper financial analysis of Facebook Company has been used to
evaluate the financial performance and capital structure of company before and after issue of
Initial public offer. It is the best method to raise the funds which is also used as tool to
strengthening brand image of company on international level. In this report, share price analysis,
evaluation of the financial performance of company and the capital structure analysis of
company has been taken into consideration.

Task-1
Answer to question no-(1)
The strategic milestone of the Facebook Corporation was to issue of the initial public offers in
market to raise the funds. This strategy was used to arrange the possible funding for the business
for the operational activities with its expanded business. This strategic milestone was to arrange
the capital at the lowest price and finance its operating and its managerial activities (Facebook
Corporation., 2016).
Advantages of IPO of Facebook Corporation
There are several advantages of IPO of Facebook Corporation which are given as below.
By using the cash inflow comes from the IPO of company, Facebook began its extensive work
on the superior social networking platform together with its business mates.
This big amount of investment in its operational activities increased the overall outcomes and
efficiency of the business at large (Facebook Corporation., 2012).
After issue of the IPO, Facebook had the increment of the 88% annual growth which strengthens
its busienss in long run.
The initial amount of cash inflow from the IPO allowed Facebook to invest its capital in making
various strategic alliances such as it acquired the Instagram portal and purchased various
advance busienss units which could be used to set up strong cyber computing mechanism
(Facebook Corporation., 2012).
The IPO of Facebook also strengthens the corporate brand image of company on international
level (Facebook Corporation., 2012).
Pitfall associated with the IPO of Facebook
The main pitfall which is associated with the IPO was related to increased compliance
program. Facebook had to face the technical issue in its IPO as the error in the NASDAQ’s trade

processing system delayed the debut by 30 minutes which resulted to the hand trading among 30
minutes. In addition to this, Facebook also had to comply with the international stock exchange
rules and regulation. It had to face high amount of penalties at the beginning which resulted to
increased cost of its services. The main impact of the poor market performance was also seen
due to the stock debut by social giant’s catastrophic understanding and that is the same denoted
by the Kayak and Vkontakte.
Motivation to go Public
With the expanding busienss and increased growth was the major factor for Facebook to
go public. However, it was observed that the private ownership of company exceeded 500
shareholders by 2011 and as per the securities exchange listing rules, if a company is having
more than 500 shareholders over $ 10 million in its assets are required to adopt the same
financial disclosure practice as adopted by listed companies. In addition to this, increased
investment in the infrastructure and research and development required high amount of
investment. This was the biggest motivation for the Facebook to invest capital in IPO (Facebook
Corporation., 2012).
Task-2
There are several ways available for the Facebook to raise funds for its business such as issue of
bonds and debentures, taking consideration from other organizations for the mutual
collaboration, government intervention capital investment and bank loans.
(A) Why was it relatively easier for Facebook to raise capital from the
stock market over the debt funding?
It is observed that when company go for the debt funding then it will have to follow the proper
compliance program and needs to take approvals from the several stakeholders. After analyzing
the annual report of Facebook, it could be inferred that company was already having high
amount of debt funding in its busienss. It is observed that if company raises more funds by using