Strategic choice: What should Facebook do with cash from the IPO?

The business pages are buzzing about the impending flotation of Facebook, with some analysts speculating that the implied valuation of Facebook based on the flotation share price will be up to $100billion. It is thought that Facebook will seek to raise approximately $10billion of new share capital through the IPO. But, what should Mark Zuckerberg and his Facebook Board do with the cash raised?

First, a bit of background. IPO stands for Initial Public Offering. It’s a term describing the event when a privately owned company offers stock in a public market for the first time.

Shares in Facebook have been traded privately for several years now. However, since Facebook now has over 500 private shareholders, financial services regulations in the USA require the business to publish financial accounts and records that might otherwise remain private. So it seems likely that Facebook will now join the likes of Zynga and LinkedIn and offer shares in the firm to the public.

If Facebook raises $10billion, what are the strategic options available to the firm? Here are two articles in which the options are analysed;

Facebook will need lots of friends to justify a $100bn flotation
http://www.guardian.co.uk/technology/2012/jan/29/facebook-flotation-friends

How Should Facebook Use $10 Billion in IPO Cash?
http://www.forbes.com/sites/georgeanders/2012/01/28/how-should-facebook-use-10-billion-in-ipo-cash-2/

This would be a good thinking exercise for business students to attempt. Come up with the options and then justify which might be most appropriate.

The sharper students will want to know a little more about what Facebook’s corporate objectives are, although it’s hard to identify these from public documents. The (very) detailed IPO documents will give us a much more detailed insight into the specific objectives of the firm.

There is a clue for students in a comment in the Guardian article:

“Zuckerberg has ambitious plans for Facebook. In the long term, he would like the eight-year-old firm to be seen as a giant like Apple, Intel or Microsoft, he told the Wall Street Journal recently.”

The articles highlight several options:

Do nothing - sit on the cash; a precautonary approach + provides Facebook with the cash resources to respond to opportunities as they arise

Grow organically - hire more engineers; open more offices.

Make acquisitions: the external growth option and, by definition, the most risky option. Facebook has made several small acquisitions in recent years, mainly to acquire patents and talented engineers.

So what do your students think?