Please prepare a write-up detailing the results of your analysis. You do not need to include a separate section detailing the background of the case in the write-up. Instead, focus only on the financial issues and assumptions to make your recommendation. The write-up can be no longer than 3 pages (excluding tables and charts).
Include a copy of the forecast table in your write-up so I know which worksheet to look at
"Calculate the discount rate, estimate future cash flows, and then use the discounted cash flow method and multiples to price Facebook’s IPO. - What is the appropriate price for the Facebook IPO? Why"
(Case is attached)
FINANCE, INSURANCE, & LAW 349: ADVANCED FINANCIAL THEORY AND PROBLEMS Fall 2020 Pick one of the two following cases to analyze: 1. Sun Microsystems (Case 48) 2. Facebook’s Initial Public Offering NOTE: Facebook is on ReggieNet, while Sun Microsystems is in the textbook. Please prepare a write-up detailing the results of your analysis. You do not need to include a separate section detailing the background of the case in the write-up. Instead, focus only on the financial issues and assumptions to make your recommendation. The write-up can be no longer than 3 pages (excluding tables and charts). Due: Wednesday, Dec 2nd. - Please upload an electronic copy of the write-up and excel spreadsheet forecast/calculations to ReggieNet via the “Drop Box” feature. o Include a copy of the forecast table in your write-up so I know which worksheet to look at. Sun Microsystems: - Calculate the discount rate, estimate future cash flows, and then use the discounted cash flow method and multiples to value Sun Microsystems. - How much should Oracle pay for Sun Microsystems? Why? Facebook’s Initial Public Offering: - Calculate the discount rate, estimate future cash flows, and then use the discounted cash flow method and multiples to price Facebook’s IPO. - What is the appropriate price for the Facebook IPO? Why? Write-up Grades: 1. Quality of information and analysis. 2. Professional appearance. 3. Assignment completed and turned in on time. Note: This assignment is an individual project and the final paper you submit must be entirely your own work. FACEBOOK’S INITIAL PUBLIC OFFERING Chris Tamm Illinois State University Abhishek Varma Illinois State University May 2013 FACEBOOK’S INITIAL PUBLIC OFFERING ABSTRACT In May 2012, as Facebook prepared for its initial public offering (IPO), company executives and investment bankers were trying to determine the initial offer price. Facebook indicated the price would be between $28 and $35 per share in its most recent pre-IPO registration statement. However, recent performance and strong investor demand during the road-show may have warranted an increase in the IPO price. Facebook had grown quickly since its founding in 2004 to over 900 million users all across the world. The dramatic growth in users had resulted in substantial revenue and income growth as well; however, there was some evidence that Facebook’s growth may have been slowing. This slowing growth along with the mixed performance of several recent technology IPOs made it difficult to forecast the future cash flows and value Facebook. In addition to the valuation, investors had to also consider the fact that Mark Zuckerberg, Facebook’s CEO, would control over 57% of the voting rights even after IPO. INTRODUCTION “Facebook knows more things about more people than does Google, and those people have stronger emotional connections and loyalty because that's where their friends are. So given a few years to figure it out, Facebook could end up being worth more than Google, which has a market value of $200 billion." -Kevin Landis, Chief Investment Officer, Firsthand Capital1 “A $100 billion valuation would have us believe that Facebook is worth 53% of Google, even though Google's sales and profits are 10 times that of Facebook” – Francis Gaskins, President, IPOdesktop.com2 On the evening of May 17, 2012, Facebook’s management team met with the senior managers at Morgan Stanley to determine the appropriate offer price for Facebook’s initial public offering (IPO). The IPO was scheduled for the next morning and Mark Zuckerberg was scheduled to ring the opening bell on the NASDAQ with Facebook commencing trading under the ticker symbol “FB”.3 The lead analyst at Morgan Stanley had completed the discounted cash 1 Bary, A. “Mad about Facebook!” Barron's, 92(20), (2012), 15-16. 2 Smith, R. “Facebook's $100 Billion Question; How to Value History's Biggest Tech IPO? The Answer will Depend on Growth and Advertisers,” Wall Street Journal, (February 3, 2012). 3 The Associated Press. “Going Public: Key Developments in Facebook's IPO,” BusinessWeek, (September 6, 2012). flow and multiples valuations; however, he knew the pricing was not that simple. While there was strong demand for Facebook’s stock, pegged at nearly 4.5 times the offering, the lead analyst wanted to ensure the investment banks’ clients were not disappointed by overpaying for Facebook, nor did it want to disappoint Facebook’s management team by leaving too much money on the table.4 Also, Morgan Stanley wanted to get the pricing right this time after it was perceived to have done a poor job in pricing recent technology IPOs, namely LinkedIn and Zynga. On February 1, 2012, Facebook filed an initial registration statement with the Securities and Exchange Commission (SEC) and formally announced its intentions to conduct an initial public offering. This was potentially the second biggest initial public offering in the history of securities markets after the Visa IPO on March 18, 2008. Facebook was founded by Mark Zuckerberg in 2004 as a social networking site for students at Harvard University and in a span of eight years it had expanded to over 900 million monthly active users globally. The potential to monetize this tremendous user base had caught the fancy of investors. The chatter about a potential Facebook IPO had been on for many years, but the financial crisis of 2007-2008 led to a slump in the IPO market. In January 2011, Goldman Sachs helped Facebook raise $1.5 billion through a private offering to off-shore investors. This offering excluded U.S investors as it had attracted a lot of media attention and was in danger of violating U.S. Security laws for private placements. It was believed that foreign investors poured in orders of more than $4 for every $1 in shares being sold.5 Thereafter, 2011 saw several technology sector IPOs like LinkedIn, GroupOn and Zynga with mixed market reactions, followed by the much awaited Facebook IPO announcement in early 2012. In April 2012 Facebook bought Instagram, a photo sharing social networking site for $1 billion and paid 70% in stock, which implied that Facebook priced its stock at $30 prior to the IPO date.6 As per the amended registration statement filed by Facebook on May 9, 2012, it initially intended to sell about 337 million Class A shares and expected the offering to fetch somewhere between $28 to $35 per share. Of the shares being offered, Facebook, Inc. was selling 180 million shares and the remaining 157 million shares were being offered by existing shareholders. Class A shareholders had limited voting rights in comparison to Class B shareholders, who were expected to retain about 96 percent of the voting rights after the IPO. Faced with extra-ordinary investor demand, Facebook filed an amended registration statement on May 16, 2012 offering an additional 84 million Class A shares, taking the total offering to 421 million shares. These additional shares were offered by existing shareholders and were not in the nature of additional shares being sold by the company. After the initial public offering, Facebook expected to have 636 million Class A and 1,502 million Class B shares outstanding. FACEBOOK Mark Zuckerberg founded Facebook while studying psychology at Harvard University. He was an avid programmer and had developed social-networking websites for fellow students, including Coursematch, which allowed users to view people taking their degree, and Facemash, where you could rate people's attractiveness.7 In February 2004 Mr. Zuckerberg launched "The facebook", which allowed Harvard students to upload pictures, personal and academic 4 Langley, M., A. Das, and A. Lucchetti, “Morgan Stanley Was 'Driver' on Facebook's Wild IPO Ride,” Wall Street Journal (Online), (June 18, 2012), Retrieved from ABI/Inform Global database. 5 Rappaport, L., A. Lucchetti, and G.A. Fowler. “Goldman Limits Facebook Offering,” Wall Street Journal, (January 18, 2011). 6 Letzing, J. “Facebook Cleared to Acquire Instagram,” Wall Street Journal, (August 29, 2012). 7 Tabak, A.J. “Hundreds Register for New Facebook Website,” The Harvard Crimson, (February 9, 2004). information.8 It also allowed members to search for people according to their interests and to create an online network of friends. Within 24 hours, 1,200 Harvard students had signed up, and after one month, over half of the undergraduate population had a profile. In August 2005, Facebook acquired the address Facebook.com and by the end of 2005 Facebook.com was accessible to nearly all the U.S. colleges/universities, high schools and some international college networks with 6 million monthly active users (MAUs), resulting in annual revenue of $6 million. Gradually Facebook expanded access to all users globally and rolled out features such as news feeds. Investor interest in Facebook began to grow as indicated by Yahoo’s