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Applied Corporate Finance Concerns

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Question:

Discuss about the Applied Corporate Finance Concerns.
 
 

Answer:

Introduction:

The overall study mainly states the concerns of a shareholder regarding stock offering of Facebook and the overall growth which could be attained by the company. In addition, the study also delivers the relative concern regarding the projected growth, which is been mentioned in the IPO of Facebook and its ability to achieve targeted gaols. The overall functioning of Facebook and management decisions method are also a serious concern for the shareholders. The concerns of shareholders is mainly regarding the growing competition in the social media platforms, which limits the possibility of Facebook to grow its revenue in time. Lastly, the overall revenue of Facebook is also evaluated to understand the future growth and current valuation of the company.

There are relatively different types of concerns regarding the stock offering of Facebook and its future growth in the stock market. These concerns mainly reflect the doubt, which shareholders have on the overall growth of Facebook. Some of the researchers mentioned that the Wall Street for increasing share valuation of company mainly needs the continuous increment in revenue growth. On the other hand, other researchers argued that IPOs after the financial crises has low responses from shareholders due to the rising concern regarding risk from investment. The concerns of shareholder are depicted as follows.

Controlling power in Facebook:

Facebook has a distinct shareholder pattern, where voting share are different from normal shares. This distinct shareholder pattern mainly comprises of Class A and Class B shares, where mainly Class B shareholders are allowed for making major decisions in the company. This distinguished shareholder selection pattern is the main concern for the company. In the Class B shareholder pattern, Mark Zuckerberg mainly holds around 55.8% of the stock, which allow Mark Zuckerberg to make all the relevant decisions. Some researchers mentioned that the controlling power of Mark Zuckerberg in Facebook mainly hinders likeness of shareholders in making adequate decision for continuous growth. The overall strategic decisions in Facebook are mainly conducted by Mark Zuckerberg, which increases concern of shareholders regarding managerial activities. Mark Zuckerberg solely takes the decisions and any mistake conducted by him could result in massive losses and hinder investment capital of the shareholders. The overall organisational structure is too centralised, where decisions taken by Mark Zuckerberg needs to be followed by all the shareholders and managers.

The initial public offering is mainly conducted on Class A, where 180,000,000 shares is been provided at the rate of $34 to $38 per share. The main concerns of shareholder is that no share is been conducted on Class B, which controls decision of the company. This mainly makes the shareholders nervous regarding the initial decision, which are been conducted to increase growth and revenue of the company. Other researchers argued that shareholders mainly reduce their exposure in the company where they are not able to make adequate decision regarding future growth of the company.

 

Intrinsic valuation of Facebook:

The second major concern for the shareholders is the valuation of the intrinsic value which is been derived for the company. This intrinsic valuation is mainly conducted from DCF valuation, which was prepared by Professor Aswath Damodaran. After evaluating the intrinsic valuation and n DCF valuation over share price of the company is mainly estimated at $32.44, which is will under the quoted price. This mainly confirms that overall valuation of the company is adequate and it might effectively help in generating revenue for shareholders. However, the main concern regarding DCF valuation is that it cannot be conducted in fast growing company, where actual values are tied up in intangibles and patens. This is the main reason behind overall valuation of initial IPOs, as it started with $20 and ended in the range of $34 to $38. This overall initial IPO range is .well above intrinsic value, which makes share of Facebook less attractive. Thus, the shareholder is also concerned about valuation of the intrinsic value, which might reduce the overall likeness for the company. Some researcher stated that wrong valuation and estimation could mainly nullify the valuation of DCF and increase risk of investment. Furthermore, all the major companies like LinkedIn, Myspace, Groupon, Zynga, etc current share price is lower than IPO. Only shares of LinkedIn are higher than its IPOs. This mainly increases the concern of shareholders regarding their investment during the IPO of Facebook and the future growth of the share price.

Thus, the overall valuation and increasing demand of Facebook share has mainly raised the initial price of IPO. This increasing demand has mainly pushed the overall IPO price to $34, which is relatively higher than the intrinsic value of $32.44. In addition, the rising demand for Facebook shares does not only increase risk from investment but also increases concern for future growth of the company. Therefore, concerns regarding IPO of Facebook are genuine and investors should be careful regarding valuation of the company.

Facebook has been accused of privacy violation, which has mainly reduced the trust of users among the websites. In addition, this mainly reduces the number of the users, which is been using services of Facebook. Moreover, the increasing negative expectations and rising lawsuits on Facebook mainly increase concerns of shareholders. The main income of Facebook is generated from advertisements, which only increases due to the rising accumulation of users. Any type of legal issues and lawsuits could mainly hamper the service user’s retention capacity of Facebook, which could hinder future revenue of the company. This mainly reduces the massive number of users, which was enjoyed by Facebook and any new lawsuit might further reduce the number of users accumulated by the company. The rising litigations against Facebook are the main concern of the shareholders, which could reduce revenue and decline the overall share value from initial IPO. Thus, the overall concern of shareholders is regarding the future share prices of the company, which might be influenced by the declining share price.

Demonstration of low revenue growth:

The overall revenue growth of Facebook has mainly declined from 2010 to 2011, where the company has mainly witnessed an increment in expenses. Moreover, the estimated revenue growth of Facebook in 2012 for advertisements mainly declined, due to increasing number of mobile users. In addition, professor Damodaran mainly stated that in 2016 Facebook overall growth might decline to 2% from 40%. This is due to the rising use of mobile Facebook usage conducted by the users. However, the mobile application of Facebook does not accommodate any advertisements, which is major source of revenue for the company. This mainly threats the long-term revenue and in turn could hinder rapid growth, which is been achieved by Facebook. This rising concern regarding the falling revenue might hinder the future growth and reduce share price of the company. Some researchers mainly depicts that valuation of Facebook could increase in future if the company includes advertisements in mobile application. This might increase revenue of the company and in turn help in generating higher profits.

The last concerns of shareholders are regarding the performance of different IPOs, which has been conducted after the economic crisis. The IPOs in US are mainly devalued after the initial public offerings and reduce investment capital of the investors. This concern is viable, as shareholders mainly need a confirmation, which does not reduce share price of Facebook from the initial IPO offerings. However, past share price performance of different companies mainly depicts the higher risk, which is faced by shareholders after IPOs. Some of the researcher mainly stated that companies like LinkedIn, Myspace, Groupon, and Zynga IPOs mainly decline in value after one year, which mainly increases concerns regarding IPO of Facebook. Some of the researcher mainly depict that value of shares decline after the initial IPOs commencements and needs adequate valuation of the company.

 

Conclusion:

The overall assignment mainly depicts the relevant valuation of Facebook and relative concerns regarding IPO initiation of the company. In addition, there are relatively factors, such as inappropriate valuation of DCF, past performance of same companies after initiation of IPOs. Moreover, mobile MAUs are mainly increasing from 2009 o 21012, which indicates that users mainly prefer Facebook mobile platform. Thus, any further decline in overall revenue from advertisement due to rising mobile users could mainly reduce share price of Facebook from its initial IPO price. The innovation of technology is mainly essential for Facebook, which could help in continued growth of the company. These depicted reasons are the main concerns of shareholders regarding the IPO initiation of Facebook.

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