You must’ve known this. Yes, last week Facebook went public. Wall Street was up on a high when the decision came from the Facebook management to go public. The consequence of the decision proved to be more than just dramatic. But, all the media hype and the market highs surrounding Facebook and its value… Did it just work?
Dude. I am new to Wall Street!
Yes. We’re not here to talk about Gadgets or gizmos. This is economics or even plainly business. So, for us to argue anything about stocks or trades, we first need to know what it means for a company to go public.
What is going public? I assume you are pondering over this question right now (Trust me, my instincts have never let me down : P) Going public means to sell portions of the company to the public in terms of small shares. Each share shall be priced at a certain rate. When you buy a share of the company, you hold ownership of a portion of the company. So therefore, more shares mean, more ownership.
Why at all does a company want to go public? There are many reasons on why a company would want to take the move. Obviously, raising capital would be a major issue. When the company is valuated at a larger price, it earns more money to the company, its investors and shareholders. This money generated may be used for Research and Development purposes, for making acquisitions and expansions in operations, more salary for the employees – which in turn could woo in more talent and brains to work for it, or at the worst cases, to clear off any existing debt. This makes the company look profitable and raises its public image as well.
When they decide to do so, they evaluate their company at a certain value and fix up an initial rate to sell the stock at. This is called the Initial Public Offering or IPO. This value later varies depending upon its market value.
Not all companies can however go public. A minimum of 500 shareholders is necessary. It needs to have a strong business strategy and management, needs to list its future plans/revenue model and very importantly, a reason on why it wants to go public at the first hand – that convinces the people at stock exchange to let it be listed.
Everyone here isn’t lucky. Going public has certain disadvantages too. If your company loses share values, you may lose your accountability to your shareholders. You are required to make your statements and balance sheets public. Not all decisions can be influenced by the board. You need to adhere to certain terms by the governing body. Under certain times, when it has lost the image, the value of the company may plunge to a very low rate– leading to either a takeover or liquidation – redistribution of existing assets, for what its worth, to its shareholders.
How a stock value changes?
There is no fixed rule to this. Stock prices dwindle upon a variety of factors, largely out of demand and supply. If the demand for the stock is more, its value raises and vice versa. No particular body or authority sets the price of the stock. It is the stake holders and people whose buying and selling of the stock that actually decides upon its value dominated by factors like Future of the company, its plans etc.
The Facebook Story
This is not Economic Times! Well, I just got reminded of that. So, what happened to Facebook? Facebook on last week went public with an IPO of $38. Amidst high hopes from the people, this company was expected to have the greatest ever opening at the NASDAQ. It was valued to be around 95 million $ much above the Google’s 23 million when it went public back in 2004.
But, things didn’t turn out the way Facebook expected it to be. Now, the stocks have gone down as low to around 27$ – almost 10$ less than the original price. What more? It was deemed the worst performing IPO of the decade by Bloomberg .
Many of them argued that Facebook had over valued itself. The idea of a nine hundred and odd million userbase company going public might sound great at the beginning. After all, it’s a brand, a trend. Well, its Facebook. But, look carefully. Not everyone thinks that way.
Facebook doesn’t have a plan on how it is going to spend its amount. We’re not talking about UI revamp or Picture Slideshows here. A most important thing for any company to remain high in the market is its ability to churn out more innovation, its ability to reach out via various spheres. It needs to sustain the stiff competition. Given all this, Facebook seriously need to think on how it is going to spend its money. Sure, not to put the money in a bank to expect for returns!
What can Facebook do to save its face?
Well, it definitely needs to look out for alternatives. A lot more acquisitions, perhaps. Instagram is definitely a positive start. Acquisitions help you expand your reach. Brings more inter operability and connectivity. Also, given Microsoft’s support and Skype deal, Facebook must be able to do something about it. Zuckerberg says he won’t go for any further acquisition deals. In all positive hope, let’s just believe it is a lie. Because, it wouldn’t help even a little for the company.
The next biggest thing out there is Mobile computing platform. They must be able to target them. Most of the users use Facebook using smart phones only. So, reaching out to larger section of people shall never be easy without mobile platform development. Advanced API support for streaming updates via other apps might help as well.
Facebook is all about sharing. Sure, if they can find better ways to integrate Facebook to bring in a more realtime sharing, I’m sure investing in it shall surely be a good option.