US rule likely to trigger Facebook IPO next year

GOING PUBLIC::With its number of shareholders expected to top 500 this year, Facebook will have to disclose its financial results, and might opt for a listing


Sat, Jan 08, 2011 - Page 10

With so many investors becoming fans of the company, Facebook will be legally required to begin sharing more information about its finances and strategy by April next year, according to documents distributed to prospective shareholders.

Some of the numbers that began trickling out on Thursday were eye-popping — most notably a net profit margin of nearly 30 percent, much higher than most people had speculated.

The owner of the world’s largest Internet social network — privately held since it started in a Harvard University dorm room seven years ago — will be forced to open its books because it expects to have more than 500 shareholders at some point this year, according to a person who has reviewed the documents handed out on Thursday.

After a firm with at least US$10 million in assets has more than 500 shareholders, the US Securities and Exchange Commission requires it to disclose its financial results and other details on a quarterly basis in an effort to ensure investors are adequately informed. The reporting requirement kicks in 120 days after the fiscal year in which a company exceeds the shareholder threshold for the first time.

Facebook’s fiscal year ends on Dec. 31, meaning it would have until late April next year to comply.

The company, now based in Palo Alto, California, could still retain a private ownership structure, but an initial public offering (IPO) is the more probable scenario given Facebook will have to make many of the same disclosures of a publicly traded company anyway.

To help keep the company private, Facebook sought and received an SEC exemption in 2008 that assured employees who received a class of stock wouldn’t be counted toward the 500-shareholder barrier. The stock awarded those employees won’t be issued until an IPO or sale of the company occurs, another factor that will pressure Facebook founder Mark Zuckerberg to drop his resistance to an IPO. Zuckerberg, 26, owns about a 25 percent stake in Facebook.

Facebook spokesman Jonathan Thaw declined to comment on Thursday.

Crossing the 500-shareholder barrier prompted Google to pursue its IPO in 2004, before the Internet search leader had turned six years old.

If Facebook follows a similar timeline as Google did, its IPO would probably occur during the summer of next year.

Some of Facebook’s financial information is being shared for the first time as part of the exclusive stock offering that the company’s newest investor, Goldman Sachs Group Inc, put together in an effort to raise US$1.5 billion. The minimum investment in the fund is US$2 million, although some exceptions are being made for Goldman’s own partners.

Some of the numbers emerging in the limited stock offering help explain why Goldman Sachs itself decided to ante up US$450 million for a less than 1 percent stake in Facebook earlier this week. The investment valued Facebook at US$50 billion, more than twice the current market value of Internet pioneer Yahoo Inc.

Through the first nine months of last year, Facebook earned US$355 million on revenue of US$1.2 billion, according to the person who reviewed the offering document. That 30 percent profit margin is in the same range as that enjoyed by Google, which posted a net income of nearly US$6 billion on revenue of US$29.9 billion through the first nine months of last year. Facebook produced a similar profit margin in 2009, with a net income of US$220 million on revenue of US$777 million, according to the person who had seen the Goldman Sachs documents.

The US$50 billion market value implied in Goldman Sachs’ investment is 25 times higher than the US$2 billion in revenue that analysts believe the company had last year. Google, the Internet’s biggest moneymaker so far, ended on Thursday with a market value of US$196 billion, about seven times its annual revenue.