Social-media IPOs: What’s the Facebook effect?

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In February 2012, Facebook filed to launch its initial public offering (IPO) of stock to much media buzz, although as of press time, the social-media company hadn’t set a date for when its stock will go on sale to the public. 

Experts with whom we spoke say Facebook has the making of a winner, but overall, social-media companies have struggled to meet investor expectations. 

A plus for Facebook is that it has much larger revenue streams than other social-media companies have, says James Lenz, who is associate director of El Paso Corporation Finance Center at Rice University’s Jones Graduate School of Business.

Share prices of numerous social-media ventures have dropped below their first-day closing prices, including Zynga (Nasdaq: ZNGA; Price: $13.02), Pandora (NYSE: P; Price: $10.60), Zillow (Nasdaq: Z; Price: $33.74), Price: $101.94) and Groupon (Nasdaq: GRPN; Price: $17.50). Lenz is particularly skeptical of Groupon, because the company’s model can be replicated easily, which could reduce the value of Groupon’s stock, he says. 

But Scott Smart, who is a finance professor at Indiana University Kelley School of Business, warns potential investors of Facebook’s dual-class ownership structure. 

Class A shares, which you can buy, have one vote per share. However, Class B shares, which only Mark Zuckerberg and other corporate insiders can purchase, have 10 votes per share. So if Facebook takes a turn for the worse, Zuckerberg and others still will be calling the shots.

S. Berg