Facebook IPO: ‘Expectations on Facebook are way too high’

As Facebook approaches its May 18 IPO date, the social network has been generating “lower-than-expected demand from institutional investors,” Bloomberg reports :

Some investors expressed reluctance after Facebook said on May 9 that advertising growth hasn’t kept pace with the increase in users, said the people, who asked not to be identified because the process is private. Facebook is also telling analysts that sales may not meet their most optimistic projections, two people said.

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Facebook executives have another week to market the IPO, set to price May 17, and underwriters are stepping up efforts to drum up interest from large shareholders, one person said. The top end of the price range values the world’s most popular social network at $96 billion, or more than Standard & Poor’s 500 Index members including Walt Disney Co. and Visa Inc.

“It’s overvalued at that price,” said Filippo Garbarino, who oversees $50 million at Frontwave Capital Ltd. in Chiasso, Switzerland. “Investors are becoming more selective and there are quite a few fallen angels around, like Netflix. Those who buy Facebook at these levels are more speculators than investors.”

Lackluster interest from institutional investors at this stage could compel the company to rely more on buying from retail investors, whose demand remains robust, people said. The company may still elicit enough demand to sell shares at or above the high end of a projected range, people said. Institutional investors tend to hold shares longer than retail investors, lessening a stock’s volatility.

Making History

Facebook, led by Chief Executive Officer Mark Zuckerberg, plans to raise as much as $11.8 billion through the IPO, the biggest in history for an Internet company. Underscoring concerns that growth may taper, 79 percent of respondents in the Bloomberg Global Poll of 1,253 investors, analysts and traders who are Bloomberg subscribers said Menlo Park, California-based Facebook doesn’t deserve the top-end valuation.

“Expectations on Facebook are way too high,” said Mitsuo Shimizu, a market analyst at Tokyo-based Iwai Cosmo Securities Co. “Given its fundamentals, the company doesn’t look anywhere cheap in valuation.”

The Federal Trade Commission may be looking into Facebook’s acquisition of Instagram, just days before the IPO. VentureBeat.com reports :

Two sources for the Financial Times say the FTC is investigating the deal for possible antitrust issues. Given that, from what we learned exclusively a few weeks ago, the deal was created in order to stick it to the competition, it’s not an unreasonable set of questions to ask.

The FTC is reportedly questioning some of Facebook’s biggest competitors — we’re looking at Google and Twitter, in particular. But in fact, such probes are routine for acquisitions worth more than $66 million or so, and this deal most certainly fits into that category.

Facebook paid $300 million in cash for the photo-sharing app, as well as 23 million shares of Facebook common stock — and Lord knows how much that will be worth after May 18 when the stock goes public.

Based on the starting price range of $28-$35 per share, Instagram stands to get between $644 million and $805 million from the second the bell rings on the 18th. By the time trading closes, there’s no telling how much the deal will be worth; however, we’re fairly certain that those 23 million shares will be far more valuable than the original $1 billion quoted as Instagram’s pricetag for this acquisition.

If the FTC doesn’t green-light the deal, Facebook will pay out a $200 million breakup fee, as stipulated in the social network’s amended S-1 filing.

In other Facebook IPO news, talk of the social network’s public market debut looks like it’s having an impact on Silicon Valley real estate prices. VentureBeat.com reports :

The impending Facebook initial public offering is pushing already-expensive Silicon Valley real estate to frenetic new highs.

The two months prior to the IPO announcement saw only 840 sales. In dramatic contrast, sales in the last two months have almost doubled to 1,531, according to Guy Wolcott, the co-founder and chief executive of the company behind real estate app HomeSnap.

It’s not just sales. The median sales price is up 15 percent in the same time period, and the number of million-dollar-plus prices is up a staggering 159 percent since the Facebook IPO announcement.

While that’s not a conclusive cause-and-effect connection (there’s a lot more wealth in Silicon Valley besides Facebook stock), the rising real estate prices do indicate that something big is happening. Once the IPO happens and employees’ lock-up periods expire, prices will go even higher.

Housing prices in desirable areas of California’s tech hotbeds have always been high, especially in San Francisco, Palo Alto, Santa Clara, and Facebook’s hometown, Menlo Park.

But in the last two months Silly Valley is just getting plain ridiculous. Think $5.5 million for this fairly large but hardly palatial family home (right). Or $4 million for a six year old home in central Menlo Park. The built-in wine cellar will help you recover from the inevitable sticker shock.

Fortunately, Facebook employees have a lot of cash coming. As of last year, Facebook employees owned around 30 percent of the company, worth perhaps $25-$30 billion when the company goes public.

 
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