Facebook Inc. (FB), the social-networking website that in eight years changed the way the world communicates, filed to raise $5 billion in the largest Internet initial public offering on record.
Facebook, whose meteoric rise spawned an Oscar-winning film and captivated Wall Street, yesterday named Morgan Stanley as the lead underwriter on the IPO, while reporting a 24-fold increase in sales over the past four years to $3.71 billion in 2011.
The planned IPO dwarfs Google Inc. (GOOG)’s 2004 offering and tests whether social-networking providers deserve market values that rival such established companies as McDonald’s Corp. (MCD) and Caterpillar Inc. The Menlo Park, California-based company is considering a valuation of $75 billion to $100 billion, people with knowledge of the matter said last week.
“The $100 billion valuation that’s being tossed around just puts it at a level we’ve never seen,” said Jeffrey Sica, chief investment officer of Morristown, New Jersey-based Sica Wealth Management LLC, which oversees $1 billion. “They have to be able to show that not only do they deserve to be at that level, but they have multiple channels to create new revenue.”
Co-founded in 2004 by Mark Zuckerberg, now 27, Facebook has grown into the world’s dominant social-networking site, squelching competitors such as MySpace Inc. with its more than 800 million users. While Facebook’s sales almost doubled last year, the company faces increasing competition from rivals such as Google, which debuted its own social-networking service last year, and short-message social site Twitter Inc., the filing shows.
A $100 billion market capitalization would value Facebook at 26.9 times trailing 12-month sales, more than double Google’s valuation when the search-engine operator went public in 2004. Facebook recruited Chief Operating Officer Sheryl Sandberg, a former Google executive, in 2008 to help expand the company globally.
Facebook didn’t specify the number or price of shares it will offer, and the $5 billion amount is a placeholder used to calculate fees and may change. The U.S. Securities and Exchange Commission’s public website suffered a slowdown yesterday as traffic surged, forcing the agency to bring on additional capacity, according to spokesman John Nester.
The stock would trade under the symbol FB on either the Nasdaq Stock Market or the New York Stock Exchange. The company plans to use the proceeds for working capital and other general corporate purposes.
In addition to Morgan Stanley, Facebook hired JPMorgan Chase & Co., Goldman Sachs Group Inc., Bank of America Corp., Barclays Plc and Allen & Co. to manage the IPO.
Net income last year surged by almost two-thirds to $1 billion, the filing showed. Last year, Facebook said it expects U.S. regulators to require that it disclose financial results by April 30, 2012, if the company hadn’t gone public by then. Facebook decided to wait until 2012 for its IPO to give Chief Executive Officer Zuckerberg more time to gain users and boost sales, people familiar with the matter said in 2010.
Zuckerberg is the company’s top holder with 28.4 percent of the shares, the filing shows. At the $100 billion market value, Zuckerberg’s stake would be worth $28.4 billion, making him richer than Google’s co-founders and almost on par with Oracle Corp. founder Larry Ellison.
Zuckerberg also used the filing to outline “the hacker way,” in a letter more than 2,000 words long, saying Facebook would be guided by that principle and not solely profit. In the document, he explains the goal of making his social network as transformative a communication tool as the printing press or television.
The filing also underscored his influence on the company’s direction, as Zuckerberg has proxy agreements with fellow stockholders that potentially give him voting control over more than half the shares. That may prove troubling to investors who want more of a say, said Charles Elson, a University of Delaware corporate-governance professor.
Accel Partners remains the top outside stakeholder with 11.4 percent of the investor votes, while Dustin Moskovitz, one of Zuckerberg’s co-founders, holds 7.6 percent voting power.
Facebook would follow a crop of social-media companies that went public in 2011, the biggest year for U.S. Internet IPOs in more than a decade, according to Bloomberg data. Nineteen companies raised $6.6 billion in 2011, the most since 101 raised $11 billion in 2000, the data show. Professional-networking site LinkedIn Corp. (LNKD), music-streaming service Pandora Media Inc., daily-deal site Groupon Inc. and social-gaming company Zynga Inc. all sold shares last year.
In outlining its potential risks in the filing, Facebook cited hacker attacks, regulatory scrutiny, a shift to mobile technology and rivals such as Google+. The company also said it would face competition in China if it manages to gain access to that market, where its site is currently blocked.
Facebook is increasing its focus on mobile technology to take advantage of the shift to smartphones and tablets. It expects its next 1 billion users to come mainly from mobile devices, rather than desktop computers.
The company made at least 10 acquisitions in 2011, including group-messaging service Beluga in March. In addition to buying startups, Facebook has enabled hundreds of others to get off the ground by offering an easy, cheap and fast way for them to reach millions of potential customers, said Shervin Pishevar, a managing director at Menlo Ventures in Menlo Park, California.
“There will be a lot of $1 billion-plus companies built on these platforms,” said Pishevar, who owns Facebook shares.
As the site’s popularity grew, banks, hedge funds and mutual fund companies started buying stock. In January 2011, Facebook said it raised $1.5 billion in a financing round led by Goldman Sachs that valued the company at $50 billion. Goldman Sachs, funds managed by the firm, and Digital Sky Technologies bought $500 million of stock, while Goldman Sachs offered $1 billion of shares to non-U.S. clients.
While Facebook has steadily added users since its creation, it has faced increased scrutiny over its protection of user data. In November, the company agreed to settle privacy complaints with the Federal Trade Commission. The move may help allay criticism that it doesn’t do enough to shield the information it prods users into sharing.