Facebook will increase the size of its initial public offering by 25 per cent, and could raise as much as $16 billion.
Facebook, founded eight years ago by Mark Zuckerberg in a Harvard dorm room, will add about 85 million shares to its IPO, floating about 422 million shares in an offering expected on Friday, a source familiar with the matter said.
The expanded size, coupled with Facebook’s recently announced plans to raise the IPO price range, would make Facebook the third-largest initial share sale in U.S. history after Visa and GM. Facebook declined to comment on the increased IPO size, which was first reported by CNBC on Tuesday.
The social networking company is drumming up massive demand for the offering even as slowing revenue and user growth spur questions about the long-term Facebook story.
"This is much more a spectacle, a media event and a cultural moment than it is an IPO," said Max Wolff, an analyst at GreenCrest Capital. "This is not a game of models and fundamentals at this point."
GM's announcement to pull out of advertising on Facebook, while ill-timed, should not seriously hurt Facebook’s IPO reception for now as it may not be representative of advertisers' overall attitude, said Brian Wieser, an analyst with Pivotal Research Group. "The demand for the IPO probably won't be affected materially by this," he said, noting, however, there were probably a lot of calls between underwriters and investors following GM's announcement.
The IPO, Silicon Valley's largest, eclipses the roughly $2 billion debut by Google in 2004.
Facebook raised the target price range to $34-$38 per share in response to strong demand, from $28-$35, according to a Tuesday filing. That would value the company at $93-$104 billion, rivalling the market value of internet powerhouses such as Amazon.com, and exceeding that of Hewlett-Packard and Dell combined.
The increased price range made it very unlikely that Facebook shares would double on their trading debut as they might have if the company had come out at the low end of its initial price range, Wolff said. He expects a first-day gain of about 10 per cent.
"No rational person thought they were buying the stock for $28," said Wedbush Securities analyst Michael Patcher, noting Facebook had traded as high as $44 in the secondary markets in recent months.
Facebook said in its latest filing that it arrived at the higher IPO price range after one week of marketing the offering - part of a cross-country roadshow in which CEO Zuckerberg has taken the stage to lay out his vision for the company's money-making potential and its top priorities.
The price range hike, coupled with strong results from internet and social media players Groupon and China's Renren, contributed to a dotcom rally on Wall Street on Tuesday. Shares of Pandora Media rose 10.3 per cent, Zynga was up 7.7 percent, Groupon climbed 3.7 per cent and Renren gained 6.4 per cent.
Before the IPO size was increased, Facebook would have raised about $12.1 billion based on the midpoint price of $36 and the 337.4 million shares on offer originally.
At this midpoint, Facebook would be valued at roughly 27 times its 2011 revenue, or 99 times earnings. Google went public at a valuation of $23 billion, or 16 times its trailing revenue and 218 times earnings. Apple went public in 1980 at a valuation of 25 times its revenue and 102 times earnings.
Facebook’s IPO comes as some investors worry the company has not yet figured out a way to make money from a growing number of users who access the social network on mobile devices such as smartphones. Meanwhile, revenue growth from Facebook’s online advertising business, which accounts for the bulk of its revenue, has slowed in recent months.
With some 900 million users, it had $1 billion in net income on revenue of $3.7 billion in 2011.
The company has also extended the time frame for its $1 billion acquisition of mobile app maker Instagram, projecting the deal would close this year instead of the second quarter as it previously indicated.
It provided no reasons, though a source familiar with the matter said last week that the U.S. Federal Trade Commission has reached out to Google and Twitter as part of the agency's standard review for deals of that size.
Facebook is scheduled to price its shares on Thursday and begin trading on the Nasdaq on Friday. A host of Wall Street banks are underwriting the offering, with Morgan Stanley, JPMorgan and Goldman Sachs serving as leads.