There are conflicting reports of Facebook's valuation at its initial public offering. The Wall Street Journal reports an IPO valuation of $96 billion; Forbes indicates the IPO market cap is $86 billion; my prior post on the matter estimates an IPO market cap of $75 billion. What gives? Basically there are two reasons for the difference. First is the difference between "market capitalization" and "valuation." Second is how these terms are calculated, which in Facebook's case primarily relates to the issue of how to treat options and similar instruments.
"Market capitalization" or "market cap" is basically the stock price multiplied by the number of shares currently outstanding. In Facebook's case, the targeted IPO stock price is between $28 and $35 dollars (according to its registration statement - see prospectus cover page), and it will have 2,138,085,037 shares outstanding after the IPO. This gives an IPO market cap of $59.9 billion at the low end of the range ($28 per share), $67.3 billion at the mid-point of the range ($31.50 per share), and $74.8 billion at the top of the range ($35 per share). My post used the high end of the range to calculate Facebook's IPO market cap.
Market cap has a drawback in that it does not take into account the impact of stock options and the like, which when exercised adds to the number of shares outstanding. In Facebook's case, page 42 of the prospectus indicates there are potentially a total of nearly 681 million shares which could possibly be exercised at some point in the future and added to the 2.1 billion outstanding. This includes 378 million shares pursuant to restricted stock grants, 116 million shares through Class B stock options, 60 million from a stock option issued to Mark Zuckerberg, 25 million shares from recent option grants and stock issuances, 23 million shares to be issued to Instagram when the acquisition closes, and another 77 million shares that could be issued in the future under equity compensation plans. Backing out the 77 million reserved for future issuances (because this may or may not be issued), the total becomes 603 million shares that could be issued from exercises of stock options, etc. Assuming that all of these shares are issued (which is unrealistic, but provides an upper end to the range), total shares outstanding on a "fully-diluted" basis are 2,741,567,754, which multiplied by $35 per share (the top of the IPO price range) gives a "fully-diluted" valuation of nearly $96 billion. This is what The Wall Street Journal reports for the IPO valuation. At the mid-point of the range, the fully-diluted equity valuation is $86 billion, which is what Forbes is reporting. In my opinion, Forbes should not have used the term "market cap" in the title of the article as what it refers to in the article is fully-diluted equity value.
Now the corporate finance purists will say that the above analysis is incorrect, because it does not take into account the strike prices of the options. This is true - the above is a quick and dirty analysis. However, because the strike prices are very low (6 cents for the Zuckerberg option) and 95 cents for the Class B options, calculating the option shares using the Treasury method won't have a material effect on the above analysis. Also, some purists will say that the valuation should be "enterprise value" and they would be correct, but that's a topic for a future post.
Links:
Facebook S-1/A registration statement: http://www.sec.gov/Archives/edgar/data/1326801/000119312512208192/d287954ds1a.htm
The Wall Street Journal article:
http://online.wsj.com/article/SB10001424052702304746604577382210530114498.html
Forbes article:
http://www.forbes.com/sites/tomiogeron/2012/05/03/facebook-seeking-ipo-with-market-cap-of-86-billion/
My prior post:
http://www.allenlatta.com/1/post/2012/05/facebook-files-targeted-ipo-price-range.html
"Market capitalization" or "market cap" is basically the stock price multiplied by the number of shares currently outstanding. In Facebook's case, the targeted IPO stock price is between $28 and $35 dollars (according to its registration statement - see prospectus cover page), and it will have 2,138,085,037 shares outstanding after the IPO. This gives an IPO market cap of $59.9 billion at the low end of the range ($28 per share), $67.3 billion at the mid-point of the range ($31.50 per share), and $74.8 billion at the top of the range ($35 per share). My post used the high end of the range to calculate Facebook's IPO market cap.
Market cap has a drawback in that it does not take into account the impact of stock options and the like, which when exercised adds to the number of shares outstanding. In Facebook's case, page 42 of the prospectus indicates there are potentially a total of nearly 681 million shares which could possibly be exercised at some point in the future and added to the 2.1 billion outstanding. This includes 378 million shares pursuant to restricted stock grants, 116 million shares through Class B stock options, 60 million from a stock option issued to Mark Zuckerberg, 25 million shares from recent option grants and stock issuances, 23 million shares to be issued to Instagram when the acquisition closes, and another 77 million shares that could be issued in the future under equity compensation plans. Backing out the 77 million reserved for future issuances (because this may or may not be issued), the total becomes 603 million shares that could be issued from exercises of stock options, etc. Assuming that all of these shares are issued (which is unrealistic, but provides an upper end to the range), total shares outstanding on a "fully-diluted" basis are 2,741,567,754, which multiplied by $35 per share (the top of the IPO price range) gives a "fully-diluted" valuation of nearly $96 billion. This is what The Wall Street Journal reports for the IPO valuation. At the mid-point of the range, the fully-diluted equity valuation is $86 billion, which is what Forbes is reporting. In my opinion, Forbes should not have used the term "market cap" in the title of the article as what it refers to in the article is fully-diluted equity value.
Now the corporate finance purists will say that the above analysis is incorrect, because it does not take into account the strike prices of the options. This is true - the above is a quick and dirty analysis. However, because the strike prices are very low (6 cents for the Zuckerberg option) and 95 cents for the Class B options, calculating the option shares using the Treasury method won't have a material effect on the above analysis. Also, some purists will say that the valuation should be "enterprise value" and they would be correct, but that's a topic for a future post.
Links:
Facebook S-1/A registration statement: http://www.sec.gov/Archives/edgar/data/1326801/000119312512208192/d287954ds1a.htm
The Wall Street Journal article:
http://online.wsj.com/article/SB10001424052702304746604577382210530114498.html
Forbes article:
http://www.forbes.com/sites/tomiogeron/2012/05/03/facebook-seeking-ipo-with-market-cap-of-86-billion/
My prior post:
http://www.allenlatta.com/1/post/2012/05/facebook-files-targeted-ipo-price-range.html
