Since announcing its intention to become a Publicly traded company, Wall Street and the Tech world has been buzzing with speculation. Wall Street investors are focused on how much money is to be made while Tech experts are questioning what changes this will bring to the Social Media giant.
Today on Down to Business English, Skip and Dez take a close look at what an IPO is, how this IPO might change Facebook, and is it a good investment?
Skip: This is Skip Montreux in Tokyo Japan
Dez: And I’m Dez Morgan in Abu Dhabi in the UAE.
Skip: And you are listening to an all new episode of Down to Business English.
Skip: Good to hear your voice Dez. I trust that all is well with you.
Dez: Thanks Skip. As a matter of fact things are going really well at the moment.
Skip: Oh? Anything in particular happen to put you in such a perky mood?
Dez: Well it’s a culmination of things I suppose. I’ve been enjoying the weather recently, I’m working with a nice group of students at the moment, and to top it all off, my stock portfolio is starting to see a glimmer of hope.
Skip: That is good news indeed. I imagine more people in your position are seeing similar results with stock markets in North America and Asia slowly climbing back to the levels before the crash in 2008.
Dez: Perhaps, but managing your own stock portfolio is still a very tough slog.
Skip: Best left to the experts I suppose.
Dez: I wouldn’t recommend going it alone, unless you have a knack for doing research. It takes a lot of time to evaluate companies, look for trends, and take the pulse of world events.
Skip: Sounds very demanding. So I guess you are all up to date with what is happening with the recently announced Facebook IPO?
Dez: Well, embarrassingly enough, no I’m not. To tell the truth, I don’t invest that much in tech stocks or Internet companies, so I don’t follow them as closely as other sectors.
Skip: Oh, you are more into traditional investments?
Dez: Yes, I tend to stick with commodities for short term trades and large blue chip companies for the longer term. However I did hear their announcement last month about going public, but I’m not quite up to speed on the details.
Skip: No problem. If you can help by explaining what an IPO is, I will fill everyone in with the nitty gritty details the Facebook IPO.
Dez: Yeah, sounds fair.
Skip: So lets do it. Let’s get D2B…Down to Business with Facebook’s IPO: what is it, how will it change Facebook, and most importantly—is it a good investment?
Skip: So Dez, let’s start off with that acronym. Could you explain to all of us exactly what is meant when we hear the term IPO?
Dez: IPO stands for Initial Public Offering and it basically refers to the price of a company’s stock when it is listed on a stock exchange for the first time.
Skip: So when a private company decides to go public they determine the opening price of one share in that company and that price is their Initial Public Offering or IPO.
Dez: Yes, but when you hear someone talking about a company going public, or its IPO filing, they can be referring to the entire process of determining that price. Officially that process is called a prospectus.
Skip: So it is more involved than just picking a number?
Dez: Oh yes. It’s quite a detailed procedure that often involves using a 3rd party auditor to look at the company’s financial status and properly report that information. Unlike a private company which isn’t under any obligation to disclose its financial information, a public company has to report every last detail. From their assets, to employee salaries, to revenue. Even the names of current investors need to be transparent.
Skip: As one would expect if they were considering investing their money in a company.
Dez: Absolutely. Once a company goes public they have a fiduciary duty to the investor. And that is one of the pitfalls of being a public company. They tend to be more concerned with the results of the next quarter rather than the long term health of the company.
Skip: It sounds like a huge negative, almost as if a company has to give up its independence. Let me ask you this; what motivates a company to go public? I mean, what is the benefit to losing all that control just for being listed on a stock exchange?
Dez: The biggest reason is to raise capital. As a private company, your capital, or in other words the money you have available to invest in new projects and expansion, is limited to your profits, private investors, and borrowing money from banks.
Skip: Investing its hard earned profits, finding private investors which they will have to pay back someday, and borrowing money from a bank incurring interest charges–not exactly great options.
Dez: Exactly. Now contrast that to going public. When a company lists on a stock exchange, they suddenly have access to a substantial amount of money to use as capital with the added benefit that they don’t have to repay that money.
Skip: They don’t?
Dez: No. Since it is a traded stock, investors can liquidate at any time. If they sell when the price is high, they get a high return. If the price is low….well such are the dangers of investing in the markets.
Skip: So that is the trade off. A private company gives up its independence and control in order to get access to a large amount of capital that they don’t have to repay.
Dez: That’s right. So those are the nuts and bolts of an IPO. What can tell us about Facebook’s IPO?
Skip: Well, as you mentioned earlier, last month Facebook announced that after being a private company since their inception in 2004 they will be going public this Spring.
Dez: An announcement that I am sure many tech brokers have long awaited.
Skip: Well if you look at what happened when Google went public in August of 2004, there certainly is the potential for making a lot of money. Google’s IPO was $85.00 per share and within a few short weeks was trading around $200. They were able to raise $2¾ billion dollars and really haven’t looked back since.
Dez: How much money is Facebook trying to raise with their IPO?
Skip: When they filed their prospectus with the Securities and Exchange Commission, they announced that they intended to raise $5 billion dollars.
Skip: But most experts agree they will be able to raise even more. Perhaps even as high as $10 billion dollars.
Dez: I guess the big question would be is Facebook actually worth $10 billion?
Skip: It is up for debate. But based on what they reported in their IPO filing, Facebook is a very healthy company. Here is what we have learned about them. Facebook has been profitable for the past 3 years. Last year it had revenues totalling $3.7 billion and a profit of $1 billion. Those revenues were up 88% from the year before.
Dez: For such a young company that’s amazing.
Skip: Yes, when Google went public its revenues were only about $1 billion.
Dez: I imagine that most of Facebook’s revenue is coming from advertising?
Skip: That’s right. Advertising accounted for 85% of their revenue last year, although that was down from 98% the year before. In contrast to revenue, the filing reported that in 2012, Facebook spent $606 million on infrastructure; mainly servers and data centers.
Dez: That is a significant cost to store all their user’s information.
Skip: No doubt. Other interesting information that came out in the IPO filing: Mark Zuckerberg owns 28% of the company, and has personal access to the company’s private jet. Currently he takes a base salary of $500,000, but he is expecting his net worth to be around $30 billion after the company goes public. He has announced that as of 2013 he will reduce his CEO salary to just $1 per year.
Dez: If I had $30 billion with a ‘B’, I don’t think I would worry too much about a salary either.
Skip: Me, neither. So after hearing all that Dez, what do you think: does buying stock in Facebook sound like a good investment?
Dez: I’m not convinced. One reason I shy away from the tech sector is that it’s so difficult to price. I mean, do you remember News Corp’s purchase of MySpace?
Skip: Very good point.
Dez: Well one thing is for sure, this IPO is going to make a lot of people, not just Zuckerberg, very rich, very quickly. Tell me Skip. Do you think the IPO will change the company?
Skip: It’s hard to say for certain. Some cynics say that this is a risky move for the company as they will now be more focused on meeting stockholder’s financial expectations instead of focusing on their user’s experience.
Dez: Well you have to admit that Facebook has never really suffered from upsetting users. They seem to get away with it every time they make changes to their privacy settings.
Skip: Very true. We will certainly have to follow up on this story after the IPO in April to see what happens.
Dez: Yes we must. Unless I decide to invest and make enough money to retire. I think in that case I might be on a sunny beach in the South of France.
Skip: With your favorite co-host I’m sure.
Dez: Recording D2B live from the beach, but in the meantime, let’s get D2V…Down to Vocabulary.
Skip: Just before we get going with Vocabulary today, I have an announcement to make. Those of you who have been listening to D2B since the early days may have noticed that we have cut back on the number of words and phrases we deal with in the D2V section of the show.
Dez: Yeah, I remember those days.
Skip: We used give examples for 10 or more words but have found that it makes for a very long episode, so we have cut down to only 6 or 7 words. However, if there are any words or phrases in today’s episode that you would like to get an explanation for, I want to invite you to point it out on the wall of our Facebook page. Once you do that, either Dez or myself will reply and everyone can benefit from your question. And, just to give you a little incentive, if you post something on the Facebook wall, we will send you a complimentary copy of the audio script for our recent D2B Unplugged episode.
Dez: Great idea. Shall I get started?
Skip: By all means.
Dez: First up today is the expression a tough slog. This expression communicates that whatever you’re referring to is hard work. It conveys that the process is slow, difficult, and a success at the end of the process is not certain. In the story, I remarked that investing in the stock market without the help of a professional broker can be a tough slog.
Skip: My day today was a tough slog. A 2 hour class in the morning followed by 5 hours of writing student evaluations, followed by another 2 hour class at night and now I’m online recording with you.
Dez: Yes, that does sound like a tough slog.
Skip: The next word pair we are going to look at is very much a financial/legal term; fiduciary duty. I think everyone is familiar with duty which is synonymous with the noun responsibility. The word fiduciary is not as common however. As a noun a fiduciary is a person or party that is legally entrusted to take care of another person’s money or investment.
Dez: Therefore you mean a fiduciary duty describes the relationship between the fiduciary and the investor?
Skip: That’s right. In the story Dez says that once a company goes public they have a fiduciary duty to the investor. In other words, they have a responsibility to take care of their investors money. Can you give an example Dez?
Dez: I’ll try. Michael Jackson’s lawyers have a fiduciary duty to manage his children’s inheritance until they are old enough to manage it themselves.
Skip: Good example. Okay, what’s next?
Dez: I would now like to explain the noun pitfall. A pitfall is a hidden problem that you encounter in your attempt to achieve something. It’s synonymous with the words danger or drawback. In the story I said that one pitfall of becoming a public company is you are forced to focus too much on the short term rather than on the distant future.
Skip: I don’t know about you Dez, but I find that one of the pitfalls of living overseas is that you quickly lose touch with the culture of your home country.
Dez: Yeah, that’s certainly a drawback. Although it’s not as bad today with the Internet as it used to be before.
Skip: Moving on, my next word is the verb to liquidate. This too is a financial term. When you liquidate something, you are selling it for its cash value. In the story, Dez explains that Facebook investors can liquidate at any time to get their money back. Simply put, they are free to sell their stock to someone else.
Dez: Before moving to the UAE from England, I liquidated all my assets; car and furniture basically anything I couldn’t bring with me. I sold everything on an online auction site and used the money to have a really big goodbye party for myself.
Skip: Exactly, how much furniture did you have?
Dez: Not so much, but enough to have a good time. Now let’s look at the noun trade off. A trade off is similar to a compromise in that you are giving something of value away in exchange for something of a larger benefit. In the story, Skip observed that when a private company goes public, they trade off their independence in return for a large amount of capital. Can you give us another example Skip?
Skip: Sure, for years here in Japan, I worked for many different schools and agencies as a freelance corporate language trainer. A few years ago I gave that up to take a full time position. Although my annual salary is now slightly lower, the trade off is that I have more free time and a better quality of life.
Dez: Really? You seem busier than ever now.
Skip: Yeah, well welcome to the wonderful world of podcasting. Dez, do you have another word?
Dez: Yes I do. Our final word for today is the expression to not look back. When you use this idiom, you are communicating that you have been constantly getting better at something and have no regrets for a decision you’ve made in the past. In the story Skip reported that Google has not looked back since becoming a publicly traded company. What he means is that since that point in time, Google’s share price has constantly improved and they have no regrets about going public.
Skip: For example, ever since deciding to adopt a more open approach to capitalism in the 1990s, there has been no looking back for the Chinese economy. It has gone from having a very modest, even small GDP, to being the second largest economy in just a little over 30 years.
Dez: And that is our vocabulary for today.
Dez: Thanks for that report Skip. I’m going to have to take a closer look at Facebook as a possible investment.
Skip: Well please let me know what you decide. Thanks for listening everyone, we hope you enjoyed today’s episode.
Dez: Don’t forget to visit our Facebook page to post questions you may have about other phrases or vocabulary we didn’t discuss in the show.
Skip: See you next time everyone.
Dez: See you. Bye.