Monday, September 03, 2012

Facebook’s future, Zuckerberg’s choice!

While the world debates over when Facebook will go public and what its worth would be, Mark Zuckerberg is worried about a decision he has to make – sell-off his 24% stake & bid adieu to Facebook or alter the very business model by diversifying. What should he choose? by Steven P. Warner

How much is Facebook worth? Actually, the 26 year-old founder & CEO of Facebook – Mark Zuckerberg, doesn’t care. He publicly claims so. In fact, he proved it when he outplayed a clever Wolf’s bait (Michael Wolf, the-then President of Viacom’s MTV Networks) in the fall of 2005. The 19 month-old Facebook, was then, only famous in American circles. To befriend Zuckerberg, Wolf proposed a jet ride from San Francisco to Westchester (NY). During the five hour-long flight, Wolf postulated that Zuckerberg should consider selling a stake in Facebook to Viacom. That was around 10 pm on a cold December night of 2005.

The following month, Wolf flew to Palo Alto, to propose a stake purchase to Zuckerberg. He declined. Another month, another attempt; only this time, Wolf had no Power Point ready and underwent a more delicate experience. He got to visit the youngster’s one-room untidy apartment. The outcome however remained unchanged – Zuckerberg yet again declined Wolf’s $1.5 billion offer for a 100% stake in Facebook. That was 3 pm on a February afternoon of 2006.

Many thought that the Harvard drop-out had then caught the wrong end of the fishing line. He hadn’t. Today, Zuckerberg is the youngest self-made billionaire on the planet, worth $4 billion and owns 24% stake in a much bigger Facebook, with a user base of over 580 million (it crossed the 500 million mark in April last). Better still, his social networking machine is now cash-flow positive and after making $700 million in revenues in 2009, is forecasted to touch $2 billion this year. It also has plans to go public sometime between late 2011 & early 2012. So will the market consider this intangible web property worth billions of tangible green bills?

Over the years, Zuckerberg has accepted some overtures that have certified the market values of his brainchild. In March 2008, when Microsoft signed a contract that included a 1.6% stake buy in Facebook for $240 million, it put the value at $15 billion. The $4 billion current valuation of Zuckerberg’s stake also puts Facebook’s market value at a close $16.7 billion. There are also experts that are optimistic about a post-IPO Facebook. Rick Sturm, CEO of New York-based Enterprise Management Associates (EMA), tells B&E, “The Mcap of Facebook is likely to be around $34 billion.” We have our doubts.

Even if we assume Facebook to be the next big wave after Google, its value (considering the ratio of Google’s Mcap of $27 billion on Listing day and its revenues the previous year) comes to only $11 billion – exactly what US-based Next Up Research’s independent forecast and Felix Investments’ $25 per share offer value it at. There is also a great similarity between the two online companies in case of revenue streams, which gets us to expect a Google-like market reaction to Facebook’s IPO. [When it went public, Google was earning 99.97% of its revenues from ads, almost equal to Facebook’s 100% today.] There is however a small hitch – six years back, the market was bullish and investors were willing to dole out billions without much of a thought. Today, the sentiments are more “cautious”. Also, Facebook’s user base of above 580 million does not imply the same number of “unique” visitors. There is bound to be some double count, which weakens Facebook’s case (which was not the case with Google’s model when it went public in August 2004). In short, the Mcap could fall well short of $11 billion. Says Massachusetts-based Internet Analyst Richard Louis to B&E, “The market value of Facebook is unclear. At this time, it is just an alternative site to post information. Over the years, its market value will fall due to obsolescence, if it doesn’t change.”


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