Facebook to top $100bn valuation

Facebook has set its share price for its initial public offering at $38, which values the firm at $104bn

Facebook has set its share price for its initial public offering (IPO) at $38, which values the social networking company at $104bn.

Initially, the firm set the share price at between $28 and $35 per share, which would have capped the value of the company at around $95bn.

But in the past week, Facebook increased the price range to between $34 and $38 in response to investor demand, settling for the upper end for the start of trade in New York today.

Despite investor concerns about the firm's ability to generate profits, especially as users move to mobile devices, demand for shares is expected to be high. This could push the share price even higher, as happened when Google and LinkedIn went public.

But analysts have estimated that Facebook generates only around $5 per user per year, and said the company will need to generate annual revenue of $30bn-$40bn to justify the $104bn valuation. It remains to be seen if the company can attract enough advertising.  

Public company, privately managed

Earlier this week, Facebook said it would be selling 421 million shares – about 25% more than originally planned.

Although Facebook will become a listed company, the dual-class shareholding structure will allow Facebook co-founder Mark Zuckerberg to continue running it as a private company.

After the IPO, Zuckerberg is expected to control more than 57.3% of the voting power through shares and voting agreements with other stockholders.

The shares on offer carry only one vote each, but the original owners' shares carry 10 votes each, which means they will control more than 96% of the votes after the public listing, with Zuckerberg holding just under 56% of the voting power of the company, according to the BBC.

Zuckerberg, who owns about 25% of the company, will gain the most from taking Facebook public. The move will also make paper-billionaires of fellow founders Dustin Moskovitz and Eduardo Saverin, and former employee Sean Parker who founded Napster before joining Facebook.

US venture capital firm Accel Partners and Russian internet investment group Digital Sky Technologies also hold significant stakes in Facebook, while Microsoft and U2 frontman Bono also stand to make a huge profit on their investment in the company.

Venture capitalists choosing safer options

But one investment expert said that while some investors will benefit immensely from the Facebook listing, it "papers over the cracks" of what is really going on in the technology sector.

"Only an estimated 1% of all Silicon Valley start-ups ever get funded by venture capitalists. Of that 1%, only 1.9% exit at the dream valuation of $100m or more – less than one in 5,000," said Robert Marcus, chief executive of QuantumWave Capital, an investment bank for technology start-ups

“This public offering does not hide the fact that more than 80% of recent high-tech flotations are well below their list price," he said.

According to Marcus, at the end of 2011, some 215 companies were on indefinite hold for flotations. The waiting list, the longest since 2001, indicates the depth of market weakness, he said.

In the past decade, the time to reach flotation has nearly doubled from five-and-a-half to nine years. "Longevity is not a good thing, as 86% of all start-ups in Silicon Valley are out of business in 15 years for reasons other than a successful sale," said Marcus.

Venture capitalists, he said, function more like banks or private equity firms. "Instead of taking on the riskier investments that fuel innovation, they are handling the later growth rounds for more established start-ups, and they build a consortium to reduce risk. Today’s Facebook IPO is a prime example of this," said Marcus.

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