Raising Equity Capital (ipo)

GROUP ACTIVITY 1

Raising Equity Capital (IPO) 

Few IPOs have garnered as much attention as social media giant Facebook’s public offering on May 18, 2012. It was the biggest IPO in internet history, easily topping Google’s IPO eight years earlier. Let’s take a closer look at the IPO itself, as well as the payoffs to some of Facebook’s early investors.

1. Begin by navigating to the SEC EDGAR Web site, which provides access to company filings: http://www.sec.gov/edgar.shtml. Choose “Company Filings Search” and pick search by “Company Name”. Enter “Facebook” and then search for its IPO prospectus, which was filed on the date of the IPO (May 18, 2012) and is listed as filing “424B4” (this acronym derives from the rule number requiring the firm to file a prospectus, Rule 424(b)(4)). From the prospectus, calculate the following information:

1. The underwriting spread in percentage terms. How does this spread compare to a typical IPO?

        The underwriter spread in percentage form is 1.1%=($0.418/$38)x100.

        Compared to typical IPOs, Facebook is currently lower.

1. What is the fraction of the offering that comprised primary shares and the fraction that comprised secondary shares? How much money did the company raise through the IPO? How much money did the existing shareholders get from the IPO? And how much did the underwriters profit?

Primary offering (42.7316%) 180,000 shares and secondary offering (57.2684%)         241,233,615 share.

Underwriters profit is at $0.418 per share totalling $176,075,651

1. The size, in number of shares, of the greenshoe provision. What percent of the deal did the greenshoe provision represent?

The greenshoe provision is for 15% up to an additional 63,185,042 shares of class A common stock to cover over allotments

1. Next, navigate to Google Finance (http://www.google.com/finance) and search for “Facebook.” Click the “Historical prices” link to find the closing price of the stock on the day of the IPO. Was there underpricing for Facebook’s IPO? If so, what was the magnitude 2 of underpricing in dollars and in percentage? How does this underpricing compare to that of a typical IPO?  

Closing Price : 38.23, Underpricing Percentage = [(38.23-38)/38)*100)= 0.6%

In 2012, a typical IPO averages about 12%. When comparing Facebook’s IPO         underwriting percentage to the to the average underwriting percentage, Facebook’s stock was sold to its underwriters at a high price. This created little gains for its underwriters.

1. Use the data provided by Google Finance to calculate the following items:

1. Calculate the performance of Facebook in the three-month post-IPO period. That is, obtain the three-month holding period return an investor would have received if he had invested in Facebook at the closing price on the IPO day and sold the stock three months later at the closing price on August 17, 2012. Annualize the holding period return for comparison purposes.

        Holding period return= (19.05-38.32)/38.32= -50.29%

        Annualized Return= (1-.5029)^(12/3) -1= -93.89%

1. Do similar calculation for a roughly three-year holding period (i.e., the 34-month post-IPO period) using the closing price on March 17, 2015. Again, express the performance in terms of annualized return.

        Holding period return= (79.37-38.32)/38.32= 107.12%

        Annualized Return= (1+1.0712)^(12/34) -1= 23.3%

1. How do these returns compare to the returns of a typical IPO?

When looking at both returns, facebook has a holding period return and an annualized return that is much larger than the returns of a typical IPO.

Note: you can use the following formula to compute the annualized return:

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1. Prior to the public offering, Facebook was able to raise equity capital from Microsoft Corporation. That is, Microsoft was one of pre-IPO shareholders.

1. Microsoft made one investment in Facebook, during October 2007. Go to Facebook’s corporate news Web site (http://newsroom.fb.com/news) and locate from “Archive” the press release announcing this investment; the article titled “Facebook and Microsoft Expand Strategic Alliance” and released on October 24th, 2007. Find the information on the dollar amount Microsoft invested in Facebook. Then go back to the IPO prospectus, go to the section titled “Principal and Selling Stockholders”, and find the number of “Shares Beneficially Owned Prior to this Offering” by Microsoft. Combining these two pieces of information, calculate the per share price Microsoft initially paid.

Microsoft invested $240M initially into Facebook. After the IPO, Microsoft got 26.2 million shares of Facebook (1.6 percent stake.)