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Feb 3, 2012

Why The IPO May Not Be The Smartest Thing Facebook Ever Did


Over the last few weeks, ever since the news of a possible Facebook IPO leaked on the Internet, there have been speculations all around. This Wednesday when Facebook finally filed papers for an Initial Public offering, the speculations died down, but the world was left stunned.

Facebook revenue stood at $3.7 billion last year, and they earned a  profit of $1 billion. The company also reported that advertising receipts comprises about 85% of their total revenues. The IPO is expected to raise anything between 5 and 10 billion USD for the company.

In the light of all these astounding figures this article tries to analyze why this IPO may not be the smartest thing Facebook ever did.

1. IPO MEANS DILUTION OF CONTROL

This IPO will not only increase the company's market value but also increase its investor base. A lot of these high-profile investors, would desire greater say over the affairs of the company. Though Mark Zuckerberg would exercise control over key decision making as a result of his control over a majority of (their) voting stock, yet interference from these high profile investors cannot be ruled out, specially in the years of lean profits (although such a situation is unimaginable right now, but profits can tank and even the best of companies can suffer losses.)

2. THE NEED TO ENSURE REGULAR DIVIDENDS

As stated earlier, the IPO would raise between 5 and 10 billion USD for the company. However with such huge public funding, come the obligation of paying dividends to its shareholders. Thus the company will have to drastically increase their profits in order to ensure regular dividends to its shareholders. 

With a user base of 845 million members, Facebook is huge and getting huger by the day. However we need to remember that all those who have any access to computers probably already have a Facebook account, more particularly the younger generation, and the growth in user base would not be as dynamic as it had been in the past years.

This probably would put more pressure on Facebook employees to deliver profitable results and the focus of the company might shift. This is what The Wall Street Journal had to say "People familiar with Mr. Zuckerberg's thinking said he has long been fearful of the damage an IPO could do to the company's culture. He wants employees focused on making great products, not the stock price, they said." 

3. VENTURING INTO OTHER BUSINESS

The need to deliver consistent results would probably mean that the company may want to venture out into other businesses. They would probably want to do a Google by going an a spree of acquisitions and end up being a Yahoo.

 "We don’t build services to make money," Zuckerberg had said. "We make money to build better services." If the company can continue with this motto, there is nothing in the world that can halt their progress.

Image courtesy: Huffington post 

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