The social-networking company LinkedIn reportedly intends to file for an initial public offering (IPO) within a few months, another sign that the market for high-tech companies is heating up. In a story first reported by Reuters, it appears the Mountain View, California company, whose members include more than 85 million business professionals, could file what’s called an S-1 registration statement before April.
Reuters quoted a person close to deal as saying there are three underwriters, Bank of America Merrill Lynch, J.P. Morgan Chase and Morgan Stanley. According to Reuters, the decision to take Linkedin public was actually made in the fourth quarter of 2010, before all the news about Goldman Sachs investment in Facebook or the Securities and Exchange inquiry into the private equity secondary markets for social networking firms such as Facebook, Linkedin and Twitter. Meanwhile, Linkedin refused to confirm the report other than to say an IPO is one of the many tactics it would consider.
As for those other tactics, Goldman Sachs and a Russian company announced earlier this week they plans to invest $500 million in Facebook, the privately held social networking giant. Goldman reportedly will use a special purchase vehicle to raise and invest $1.5 billion in the company on behalf of its wealthier clients and in a way that doesn’t violate the SEC’s rule prohibiting more than 500 shareholders of a private company before that company has to reveal certain financial statements it previously kept secret.
The SEC is said to be looking into whether Facebook may be using the special purpose vehicle to skirt the law that limits the number of shareholders in a private company. Goldman reportedly was so inundated with client demand that it had to stop taking orders for shares of Facebook. Source say it even had to some would-be investors to expect just a small fraction of the shares they requested.
Investor interest in companies like Facebook and Linkedin is enormous despite a dearth of available information about their operations and financial condition. Some additional details about Facebook's performance emerged late Wednesday as part of an offering document. According to people familiar with the document, Facebook had net income of $200 million in 2009 on revenue of $777 million. Figures for 2010 weren't disclosed, but analysts have said the company's revenue last year could be as much as $2 billion, fueled by advertising growth.
There was a story in The New York Times this week that said a former Goldman partner turned down the chance to buy Facebook shares because he believes the $50 billion valuation implied by the deal is too high. He was quoted as saying Google's trading is at seven times sales so, “I'm not going to buy Facebook at 25 or 50 times sales.”
It isn't clear how many Facebook shares will be sold as part of the deal. Employees at Facebook aren't currently allowed to sell shares. Last year, though, Facebook arranged a deal in which employees could sell a total of at least $100 million in shares to the Russian company Digital Sky (DST).
Some are already calling Facebook a public company. Salesforce.com CEO Marc Benioff, who took the San Francisco-based Internet software company public in 2004, wrote: "There are now thousands of investors in Facebook and more coming with these new investment vehicles. It's already a public company. It's just unregulated."
Then come the analysts who worry about another bubble similar to the tech boom of the late 1990s followed by the burst in the beginning of the new millennium when overvalued tech companies folded under the weight of their misplaced hype.
Goldman says Facebook is valued at $50 billion. What are they basing this on? Google was valued at $50 billion in 2005 but then Google had net income of $1.5 billion. However, most sources say Facebook has revenue of about $1.5 billion but not nearly that much income. Who really knows how much income Facebook is generating? So they’re valuing Facebook at a price-to-sales ratio instead of price-to-earnings ratio of a young Google. So if you do the math, shares of Facebook today are trading for about 50 times sales and at least 1,000 times earnings. But even that’s a guestimate.
What we do know about Facebook is that it’s about seven years old, its founder is a college dropout, but then so was Bill Gates, and its home page contains 20 words, six of which are, "It's free, and always will be."
Anyone who saw the movie The Social Network will remember how the movie’s Mark Zuckerberg never seemed to care about money. All he wanted was a great company and not necessarily a profitable one. Now chances are anyone investing in Facebook is doing it to get a spectacular Google-like return on their investment. How can a website being used by more than half a billion people every day not make money, right?