Facebook IPO price hike: Appetite trumps risk

Facebook founder and chief executive Mark Zuckerberg. (Nov. Facebook founder and chief executive Mark Zuckerberg. (Nov. 15, 2010) Photo Credit: Getty Images

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Facebook Inc. boosted the price range on its initial public offering by about 14 percent, as investors' appetite for the No. 1 social network seemed to trump ongoing questions about its long-term potential to make money.

The price range, which could value Facebook at more than $100 billion, was raised a day before General Motors said it planned to pull out of advertising on Facebook, underscoring worries about slowing revenue growth.

Advertising provides the bulk of Facebook's revenue, and some investors question whether the business can grow fast enough to justify its lofty valuation.

But GM's announcement, while ill-timed, should not seriously hurt Facebook's IPO reception for now because it may not be representative of advertisers' attitude overall, said Brian Wieser, an analyst with Pivotal Research Group.

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"The demand for the IPO probably won't be affected materially by this," said Wieser. But he noted that there were probably a lot of calls between underwriters and investors following GM's announcement.

Facebook, founded eight years ago by Mark Zuckerberg in a Harvard dorm room, is raising about $12 billion in Silicon Valley's largest IPO, dwarfing the roughly $2 billion debut by Google Inc in 2004.

It raised the target range to between $34 and $38 per share in response to strong demand, from $28 to $35, according to a filing on Tuesday.

That would value Facebook at roughly $93 billion to $104 billion, rivaling the market value of Internet powerhouses such as Amazon.com Inc, and exceeding that of Hewlett-Packard Co and Dell Inc combined.

"This is much more a spectacle, a media event and a cultural moment than it is an IPO," said Max Wolff, an analyst with GreenCrest Capital. "This is not a game of models and fundamentals at this point."

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But the increased price range made it very unlikely that Facebook's shares would double on their first day of trading - expected Friday - as they might have if the company had come out at the low end of its initial price range, he said. Wolff expects about a 10 percent first-day gain.

"No rational person thought they were buying the stock for $28," said Wedbush Securities analyst Michael Patcher, noting that Facebook had traded as high as $44 in the secondary markets in recent months.

Facebook said in its latest filing that it arrived at the higher IPO price range after one week of marketing the offering - part of a cross-country "road show" in which CEO Zuckerberg has taken the stage to lay out his vision for the company's money-making potential and its top priorities.

The range hike, coupled with strong results from Internet and social media players Groupon Inc and China's Renren Inc overnight, contributed to a dotcom rally on Wall Street on Tuesday.

Shares of Pandora Media Inc rose 10.3 percent to close at $10.83, while Zynga Inc was up 7.7 percent at $8.56. Groupon was up 3.7 percent at $12.17, while Renren gained 6.4 percent at $5.84.

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Yelp Inc stock was up 3.8 percent at $20.80.

SLOWING GROWTH

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In the biggest-ever IPO to emerge from Silicon Valley, Facebook will raise $12.1 billion based on the midpoint price of $36 and the 337.4 million shares on offer, or 12.3 percent of the company.

At this midpoint, Facebook would be valued at roughly 27 times 2011 revenue or 99 times earnings. Google went public at a valuation of $23 billion, or 16 times trailing revenue and 218 times earnings. Apple Inc, meanwhile, went public in 1980 at a valuation of 25 times revenue and 102 times earnings.

Facebook's IPO comes as some investors worry that the company has not yet figured out a way to make money from a growing number of users who access the social network on mobile devices such as smartphones. Meanwhile, revenue growth from Facebook's online advertising business, which accounts for the bulk of its revenue, has slowed in recent months.

With some 900 million users, it had $1 billion in net income on revenue of $3.7 billion in 2011.

The company has also extended the time frame for its $1 billion acquisition of mobile app maker Instagram, projecting that the deal would close in 2012 instead of closing in the second quarter as it had previously indicated.

It provided no reasons, though a source familiar with the matter told Reuters last week that the U.S. Federal Trade Commission has reached out to Google and Twitter as part of the agency's standard review for deals of that size.

Zuckerberg has said improving the company's mobile products are a top priority, along with creating a "transformative" advertising experience and building stronger ties to other companies' online services.

On Tuesday, Facebook took another step in that direction, announcing it had hired the seven employees who had developed Lightbox, an app for sharing photos on smartphones based on Google's Android operating system.

MEGA IPO

Facebook's capital-raising target far outstrips other big Internet IPOs. Google raised just shy of $2 billion in 2004, while last year Groupon tapped investors for $700 million and Zynga raked in $1 billion.

Wall Street had expected Facebook to increase its price range, with investors eager to get a slice of a strong consumer brand. The IPO road show began last week and has drawn crowds of investors from coast to coast.

"It's confounding but the evidence is that if companies raise the range, they will pop more," said Josef Schuster, founder of Chicago-based financial services firm IPOX Schuster LLC. "It signals that there is such a strong demand that it will create a momentum for other investors who want to jump on."

Facebook plans to close the books on its IPO later on Tuesday, two days ahead of schedule, a source familiar with the deal told Reuters on Monday. It is scheduled to price its shares on Thursday and begin trading on the Nasdaq on Friday.

The IPO is already "well-oversubscribed," which is why the company will close its books earlier than expected, the source said.

A host of Wall Street banks are underwriting Facebook's offering, with Morgan Stanley, JPMorgan and Goldman Sachs serving as leads. Facebook will trade on the Nasdaq under the symbol "FB."

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