Doubts don't slow Facebook behemoth
Facebook will increase the size of its initial public offering by 25 per cent to raise about US$15 billion ($19.6 billion), a source familiar with the matter said, on the day General Motors said it will drop advertising on the social network.
Facebook, founded eight years ago by Mark Zuckerberg in a Harvard dorm room, will add about 85 million shares to its IPO, floating about 422 million shares in an offering expected on Friday, the source told Reuters on Tuesday, declining to be identified because the information was confidential.
The expanded size, coupled with Facebook's recently announced plans to raise the IPO price range, would make Facebook the third-largest initial share sale in US history after Visa and General Motors.
"This is much more a spectacle, a media event and a cultural moment than it is an IPO," said Max Wolff, an analyst with GreenCrest Capital. "This is not a game of models and fundamentals at this point."
Facebook declined to comment on the increased offering size, which was first reported by CNBC on Tuesday.
While GM gave no specific reason for dropping Facebook ads, a source familiar with the automaker's plans said the company's marketing executives decided the ads had little impact on consumers.
GM's planned move underscored worries about slowing revenue growth.
Advertising provides the bulk of Facebook's revenue, and some investors question whether the business can grow fast enough to justify its lofty valuation.
But GM's announcement, while ill-timed, should not seriously hurt Facebook's IPO reception because it may not be representative of advertisers' attitude overall, said Brian Wieser, an analyst with Pivotal Research Group.
But he noted that there were probably a lot of calls between underwriters and investors following GM's announcement.
CRACK IN STRATEGY
While GM's decision could be an exception in the advertising world, it marked the first highly visible crack in the Facebook strategy, said Brian Wieser, Internet and media analyst at Pivotal Research Group.
"This does highlight what we are arguing is the riskiness of the overall Facebook business model," he said. "It is not a sure thing. It sure looks likely that it will be one of the most important ad-supported media properties, but it's not certain because there will be marketers who are challenged to prove the effectiveness of the marketing vehicle."
An executive at another large consumer products company said the issue with advertising on Facebook is nobody really knows yet if it works better than traditional media and is worth the money spent. "Is it just a shiny new object, or is it a real value proposition?" said the executive, who asked not to be identified.
GM said it will still have Facebook pages, which cost nothing to create, to market its vehicles. GM pays no fee to Facebook for its pages, which allow the automaker to reach consumers directly.
GM said it regularly reviews how it spends its marketing budget and adjusts its approach as needed.
"It's not unusual for us to move our spending around various media outlets - especially with the growth of multiple social and digital media outlets," the company said in a statement.
GM spends about US$40m on its Facebook presence, but only about US$10m of that is paid to Facebook for advertising, according to the Wall Street Journal, which first reported GM's plans to drop Facebook ads. The remaining budget covers the creation of content and the advertising and media agencies involved, the newspaper said.
GM, the United States' third-largest advertiser behind Procter & Gamble and AT&T, spent US$1.11b on US ads last year, according to ad-tracking firm Kantar Media.
While Facebook makes up a small percentage of GM's advertising, the company said it was committed to using the social network.
For instance, the Facebook page for the Chevrolet Sonic small car had more than 423,000 likes. The first three months of Sonic's marketing campaign which began last October were exclusively digital, with TV ads not running until early this year.
REACHING YOUNGER CONSUMERS
GM rival Ford also is boosting its spending on Facebook, including ad buys but said the social media site is just one part of its marketing strategy.
"You just can't buy your way into Facebook," said Ford spokesman Scott Monty. "You need to have a credible presence and be doing innovative things."
More than 20 per cent of Ford's marketing budget is spent on digital and social media, he said. The company launched its 2011 Explorer SUV on Facebook and other digital outlets for a fraction of the cost of a Super Bowl TV spot, which cost US$3.5m on average per 30 seconds this year.
Automakers are increasingly turning to social media sites to reach younger consumers on their turf for less than a tenth of the cost of a traditional marketing campaign.
Ford first used social media on a wide scale to promote the Fiesta small car in 2009, spending US$5m on the campaign for the car which was returning to the US market after roughly three decades.
After the Fiesta campaign, Ford said 60 per cent of Americans who said they would buy a small car within two years said they were familiar with the Fiesta. That kind of recognition would cost US$100m through traditional means, the company said.
Most of Facebook's corporate clients, like Ford, are satisfied with the return they get from their ads, said Jason Beckerman, chief strategy officer for Unified, which helps companies analyse the impact of marketing campaigns on social networking sites. In addition to Ford, clients at his firm include German automaker BMW, P&G and Microsoft.
Beckerman, who has worked with Facebook in the past, said companies tend to be dissatisfied when they simply "throw money" at social networking sites. "Without the proper planning and structure of your buys, you are asking for little to no results."
Facebook raised the target range of its IPO to between US$34 and US$38 per share in response to strong demand, from US$28 to US$35, according to a filing on Tuesday, and would have originally raised about US$12b in the IPO.
That would value Facebook at roughly US$93b to US$104b, rivalling the market value of internet powerhouses such as Amazon.com, and exceeding that of Hewlett-Packard and Dell combined.
Facebook's capital-raising target far outstrips other big internet IPOs. Google raised just shy of US$2b in 2004, while last year Groupon tapped investors for US$700m and Zynga raked in US$1b.
Some investors worry that the company has not yet figured out a way to make money from a growing number of users who access the social network on mobile devices such as smartphones. Meanwhile, revenue growth from Facebook's online advertising business, which accounts for the bulk of its revenue, has slowed in recent months.
With some 900 million users, Facebook had US$1b in net income on revenue of US$3.7b in 2011.
The company has also extended the time frame for its US$1b acquisition of mobile app maker Instagram, projecting that the deal would close in 2012 instead of closing in the second quarter as it had previously indicated.
It provided no reasons, though a source familiar with the matter told Reuters last week that the US Federal Trade Commission has reached out to Google and Twitter as part of the agency's standard review for deals of that size.
Zuckerberg has said improving the company's mobile products are a top priority, along with creating a "transformative" advertising experience and building stronger ties to other companies' online services.
On Tuesday, Facebook took another step in that direction, announcing it had hired the seven employees who had developed Lightbox, an app for sharing photos on smartphones based on Google's Android operating system.
Facebook plans to close the books on its IPO later on Tuesday, two days ahead of schedule, a source familiar with the deal told Reuters on Monday. It is scheduled to price its shares on Thursday and begin trading on the Nasdaq on Friday.
The IPO is already "well-oversubscribed," which is why the company will close its books earlier than expected, the source said.