Facebook IPO Week: The Basics

 

Big news for Facebook this week – and no, not just because the company is testing new ways for its users to annoy each other in the form of paid-for "highlighted" posts.

Actually, it's Facebook IPO week! The significance of this fact carries a ton of importance if you're an institutional investor, a small amount of importance if you're a neophyte investor, and absolutely no meaning whatsoever if you think the stock market is little more than organized gambling.

If you're in the latter camp, don't worry: We've prepared a brief FAQ to help you understand just what the business-tech world has been buzzing about for the past who-knows-how-many months.

Q: Why should I care about the Facebook IPO?

A: Consider the basics of an Initial Public Offering. Facebook, via its 33 underwriters, will be exchanging shares of its company for cold, hard cash from investors. Facebook's war chest will balloon, giving the company an opportunity to make even more strategic acquisitions going forward. That's great news for startups in the tech space and, depending on what Facebook picks up, it could also be great news for common Facebook users if the company is able to successfully integrate better systems and features into its sprawling social network.

And who knows just how much Facebook might expand past its core business in the post-IPO world. Just look at how Google grew from a simple search engine…

Q: What happens on May 18?

A: If all goes well – and there's no guarantee that it will – Facebook will officially debut on the Nasdaq Stock Market (listed as "FB"). From there, the frenzy begins: Institutional investors and those well-connected to Facebook's underwriters will be hoping that the opening day "pop" doesn't turn into a fizzle. Day-of investors will be able to purchase shares for standard stock market prices – not necessarily the $28 to $35 per share of the IPO price – in what's sure to be a volatile bit of trading given all the assumptions and predictions being thrown back and forth pre-IPO.

It doesn't help that talk of Facebook being "overvalued" has arrived hand-in-hand with an alleged weaker demand for Facebook shares from institutional investors.

Q: What's the Facebook road show?

A: Ahh yes, the road show. The rite of passage during the IPO process typically puts company management out in front of prospective investors to showcase the big business plan, field tough questions, explain away potential strategic pitfalls, and generally convince investors that the time is right to push some cash the company's way.

Facebook's road show's been making the headlines for two major reasons: It started and, as mentioned, institutional interest appears to be a bit lower than expected. Additionally, Facebook's since amended its S-1 filing with new warnings for hopeful investors:

"While most of our mobile users also access Facebook through personal computers, we anticipate that the rate of growth in mobile usage will exceed the growth in usage through personal computers for the foreseeable future, in part due to our focus on developing mobile products to encourage mobile usage of Facebook. We have historically not shown ads to users accessing Facebook through mobile apps or our mobile website. In March 2012, we began to include sponsored stories in users' mobile News Feeds. However, we do not currently directly generate any meaningful revenue from the use of Facebook mobile products, and our ability to do so successfully is unproven. We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered."

Q: And the hoodie?

A: Ahh yes, again. The hoodie. Mark Zuckerberg loves his hoodies. So much so, that he wore one to the first big Facebook road show event in New York this past Monday.

It appears that potential investors, clad in business attire befitting the seriousness of the occasion, do not like hoodies.

"Mark and his signature hoodie: He's actually showing investors he doesn't care that much; he's going to be him," said Wedbush Securities analyst Michael Pachter in an interview withBloomberg TV.

"I think that's a mark of immaturity. I think that he has to realize he's bringing investors in as a new constituency right now, and I think he's got to show them the respect that they deserve because he's asking them for their money."

Or, as San Jose image mentor Joseph Rosenfeld put it in an interview with MSNBC, "He sort of thumbed his nose at that establishment, essentially saying that high tech is now moving into Wall Street. They're young, they're hip and they're here."

Well, a few more days until Facebook's officially here, that is.

Q: And the renouncing of the citizenship?

A: As reported the other day, Facebook co-founder Eduardo Saverin has renounced his U.S. citizenship, a move that finance watchers consider a creative tactic for avoiding the estimated $1 billion or so in taxes that Saverin could otherwise owe come Facebook IPO time. Saverin owns an estimated four percent of Facebook, which could be worth around $4 billion once the company goes public.

While Saverin still has to pay an exit tax on his assets based on their valuation when he renounced his citizenship, he's free from having to pay any tax based on future income derived from the Facebook stock.

In other words, if Facebook shares go to the moon, the earnings are all Saverin's – Singapore has no capital gains tax.

"Eduardo recently found it more practical to become a resident of Singapore since he plans to live there for an indefinite period of time," said Tom Goodman, Saverin's spokesman, in an email to Bloomberg News.