Facebook IPO Will Boost 1%, But the Rest of Us Won't Be Sharing

Unless you’ve been under a rock, you know that last week Facebook filed papers for an initial public offering. This is possibly the largest (and most hyped) IPO since Google’s 2004 debut. The company will likely go public in May in a move that could place its valuation at an eye-popping $100 billion. That’s a big deal. And there are big questions emerging about issues ranging from privacy to corporate governance to what the company’s founders owe the public. Just who are the real winners and losers in this deal? And what, if anything, will the 99 percent get out of it?

How IPOs Make the Rich Richer

So FB is putting itself on the stock market for the first time. An initial public offering (IPO) is one of the ways a company can raise loads of cash to expand its business. Or buy private jets. Or whatever.

Word is that FB will be selling $5 billion worth of equity (a small percentage of its shares) to outside investors. Doing a big initial IPO has been an iffy proposition in the last couple of years because of the recession, which may have caused FB to hang back. Now, though, there are signs that another high tech bubble is forming. A company wants to strike while the iron is hot and sell shares for as much as it can (possibly more than they are truly worth). Partners are eager to cash out and make a fortune. If FB waited too long, the company might lose the moment, so Mark Zuckerberg & Co. are going for it.

An IPO is definitely not designed for the benefit of the 99 percent. The company’s founders, the venture capital (VC) investors, and the bankers orchestrating the deal (Morgan Stanley, JP Morgan, Goldman Sachs, etc) are poised to make a pile of money. Zuckerberg, who owns 28 percent of the company, stands to make tens of billions. Not bad for a 27-year-old. If you were lucky enough to get a job with FB early, you’ll do nicely because you were likely given stock options as part of your job compensation package.

And what about everybody else? There are only a limited number of shares of the company that will be sold to bring in that $5 billion, and most of these are probably already spoken for. The investment banks involved in the deal will be offering first dibs to their big institutional clients like Vanguard, top executives at companies whose business they crave, and fatcat customers like Mitt Romney, rather than average consumers.

By the time you and I are able to buy the stock, shares will likely be priced higher than for those who got the inside track. And if the excitement over FB was just another bit of high tech euphoria, then the ordinary purchasers who bought at the high price are the ones left holding the bag if the value takes a nosedive. That’s why, as Barry Ritholz of the Big Picture put it, “the VC money is often called the smart money, where as the public IPO is often the dumb money.” Early, privileged investors have a good chance of doing well. Others roll the dice.

Bubble trouble?

Facebook has turned a profit for the past three years, according to the documents filed with the SEC. The company reported revenues of $3.7 billion last year and earned a $1 billion profit. That’s a heck of a lot more than other Internet companies that recently completed their IPOs. LinkedIn, for example, was just barely profitable when it filed for its IPO in 2011. FB’s reported 845 million active monthly users is a staggering number (though definitions of ‘active’ and ‘user’ have been questioned). Long and short: People are ready and willing to bet that FB’s stock will go up, and that’s why the company can do an IPO at such a stratospheric price.

But skeptics say that FB is likely to have an overvalued IPO. There are concerns that the company’s growth will prove difficult, maybe impossible, to sustain. Can FB monetize users as effectively as Google? What will happen if the company fails to add new users or keep existing users engaged? How can FB be sure its platform will get along with mobile devices whose operating systems it can’t control? How will it compete with China’s already-established local platforms?