Beware, Facebook is Coming to Take Your Money

By Rakesh Raman

Those who don’t believe in serendipity or good luck must look at Mark Zuckerberg and his website Facebook to change their belief. Just after its formation in 2004, Facebook was lucky enough to get its first investment the same year from PayPal co-founder Peter Thiel.

And during the past eight years, the social networking site – with a series of external investments from Goldman Sachs, venture capitalist Peter Thiel, Accel Partners, Microsoft, Digital Sky Technologies, and a slew of other kind-hearted investors – has become a quintessential case for companies that survive just on their luck that comes in the form of money from others.

Facebook’s own business performance has always remained a closely guarded secret, as it has been a privately held company.

[ Also Read: Facebook Likes Instagram; Buys it for $1 Billion ]

Taking that practice forward, now the social networking site is going to public to get more money. Facebook announced Thursday, May 17, the pricing of its initial public offering (IPO) of 421,233,615 shares of its common stock at a price to the public of $38 per share. Valued at $104 billion, Facebook is raising about $16 billion in one of the biggest IPOs in the U.S. corporate history.

While Facebook is riding the hype wave, it may not be a hunky-dory affair for the company in future. Analysts already foresee tough times ahead for Facebook after its IPO. The National Inflation Association (NIA) expects that Facebook’s market capitalization and share price will decrease in value in the coming years. (Read: Facebook Going Public at Peak Valuation: NIA)

At present, the credit must go to Facebook’s promotional paraphernalia that the company could garner such an attention from investors. It has mainly been building hype around it just by making tall claims about the number of users on its site. Currently, it claims to have over 900 million active users. But these numbers are like bikinis; they conceal more than what they reveal.

The actual “active” users are not even a fraction of the claims that Facebook makes. As these numbers can’t be vetted empirically, others believed the company and produced a movie on Facebook and even bestowed awards on Zuckerberg. But what’s the truth? (Read: Is the TIME Right to Honor Zuckerberg of Facebook?)

Likewise, there’s no trustworthy yardstick that could establish Facebook’s utility for companies that want to promote their brands through advertisements or consumer engagement on the social networking site. (Read: Why and How Companies Use Facebook)

Facebook’s only achievement is that it could build a herd phenomenon in the market, as it lures a large number of idle users by throwing the bait of third-party social games. Companies think that these users can be their potential buyers.

But, in fact, these users are like digital zombies. They don’t interact with others, they don’t do any social networking, and they’re not interested in any brand. They come on Facebook just to play games or throw in some pictures, etc. in which others are not interested. (Read: How to become a Facebook Star: 10 Tips)

Looking at Facebook, today many other market players are tempted to run social networking sites. There are dozens of similar crude sites that exist in the market today. But none of them deserves any attention because social networking is missing on all of them, though they claim to be social networking sites.

In fact, there’s a fundamental flaw in the concept of online social networking. It expects users to interact with each other, but most can’t put their feelings in words. They lack skills to express themselves on a public platform.

Facebook could do it to some extent, because most of its users are Americans who can express themselves in English language. And joblessness in the U.S. in the recent years has also helped Facebook attract more users who were idle and wanted some hangout to kill their time.

Though Facebook doesn’t seem to have any business formula to turn its claimed popularity to profits, IPO was the easiest route to make a fast buck. It has taken that route.

[ Also Read: Seven Serious UX Flaws on Facebook ]

The Facebook shares are expected to begin trading on the NASDAQ Global Select Market today, May 18, under the symbol “FB.” It is offering 180,000,000 shares of Class A common stock and selling stockholders are offering 241,233,615 shares of Class A common stock. Closing of the offering is expected to occur on May 22, 2012, subject to customary closing conditions.

In addition, Facebook and the selling stockholders have granted the underwriters a 30-day option to purchase up to 63,185,042 additional shares of Class A common stock to cover over-allotments, if any.

Morgan Stanley, J.P. Morgan, Goldman, Sachs & Co., BofA Merrill Lynch, Barclays, Allen & Company LLC, Citigroup, Credit Suisse and Deutsche Bank Securities are serving as book runners for the offering. RBC Capital Markets and Wells Fargo Securities are serving as active co-managers.

While Facebook still faces an iffy future, through this IPO, it has given a hope to its existing heavy-weight investors who can take out their money in the most lucrative way.

By Rakesh Raman, the managing editor of RMN Digital.