Small investors, big IPOs and how Zuckerberg's haul could top $28 billion
Bermuda Investment Primer Chapter 2 1 Stocks
On Wednesday, Facebook, supported by a retinue of investment bankers and advisers, filed papers with the United States Securities and Exchange Commission for an Initial Public Offering a pending sale of the privately owned company's stock. It will be a few more months before a designated number of shares will be available for purchase by the public at large, but already, the entire Internet that the company has used to full capacity is obsessed and breathtakingly so, with the news.
Who will be lucky enough to purchase a few shares? What will the initial share price be? How high will the price go? How much money will be raised?
It wasn't so long ago (well, OK, more than ten years) when technology stock prices driven by the new Internet capabilities went absolutely haywire in the same fashion.
Anyone remember the top prices paid for Rambus, Yahoo, and even the very successful Amazon? And some of those other forgettable names, that investors large and small were convinced would be the next big thing.
It was a heady time with stock values appreciating madly, 80 percent overnight, for instance, only to be bid up even higher the next day. The broad company statistics behind these valuations were ignored it seemed, even though more often than not they appeared to be based on nothing more than herd mindset.
This time is different, I think most everyone would agree. Facebook, the social media phenomenon viewed as almost a second home, best friend, business base marketer, consensus builder, talent discoverer by millions and with so many other clever connective uses, has more than 850 million users and growing.
The company has driven an exponential evolution, influencing multitudes of individuals and families across the globe by providing the ability to communicate instantly, share thoughts, feelings, promote ideas, incite enthusiasm, passion and more.
The initial public offering share price is conjectured to be $45 per share. Only speculation for now, but consider the millions of zeros attached to the financially successful launch and you know it will be so if every single Facebook user purchases just one share. Go ahead. Multiply 850,000,000 million times $45 per share! The answer: $38,250,000,000 billion dollars.
From a dorm room to a deluge of riches. As the familiar history narrates, Facebook was created in a Harvard dorm room by a young student named Mark Zuckerberg.
Now, the CEO and co-founder of Facebook Inc., he is the single largest shareholder of the company, retaining more than 28.2 percent of the shares. According to an article in the LA Times, his personal wealth may expand by more than $28 billion dollars after the IPO. He is only twenty-seven years old.
What is the origin of a public company launch, the so-called initial public offering?
Mom and Pop at the kitchen table, or students in a garage or dorm, conceive an idea, market the idea, and it sells. Almost all small businesses start with an individual or a group of excited passionate people who become successful by designing a product or service that triggers a new consumer demand.
The original business may have little structure, no one has signed anything, and there is flexible hierarchy in individual contribution. It is not incorporated. It may be a sole proprietorship, or a just a loose collaboration of individuals in a partnership achieving a common goal.
At some point, the flexible group of people running a non-incorporated business hits a head wall. To operate in the real world of holding company bank accounts, expensing payroll, negotiating loans and business insurance, meeting tax filings, financial documentation, and profit accountability, a more formal permanent structure is needed.
The individual or group will have to form a separate person (not a natural person) but a legal stand-alone entity, an incorporated company. Bermuda companies are incorporated with the issuance of the company shares, generally, 12,000 [AT] a cost of $1 one dollar each. Initially, the stock is owned by one individual, or divvied up into equal percentages between the original group of creators. And there the shares sit because this is a private company structure owned by a few people who have no intention of selling any of their shares to a bunch of strangers. This is their equity privilege. Everything about the company structure is confidential and private, not disclosed or known to anyone but the few shareholders who have a right to all information (financial statements etc) about their company.
Good small companies do grow, successfully. That is their mandate and business model, for without growth, a company will stagnate and die. Millions of companies (particularly family owned) across the global spectrum are financially profitable without ever “going public.”
Many, many more companies make the decision to invite the investing public to take up an ownership position alongside the original shareholders by, yes, launching an initial public offering.
An IPO is a complex undertaking loaded with legal, regulatory, risk, tax, investment and accounting processes. And that is just the beginning. The company must report quarterly results, the shares must be listed on a stock exchange, the financial statements must be routinely audited.
From secrecy and non-disclosure to transparency and exposure once a public company, the company books are now open to public scrutiny, right down to inevitable minutia for the detail minded investor.
Among thousands of various information releases that any investor can see in the public domain (published reports, websites, investment data gathers) are the chief executive officer and all material players salaries', stock compensation, pension arrangements, deferred retirement structures, tax liabilities, cash on hand, loans, equity, capital reserves, number of shares, shareholders, disclosure of conflicts of interest, prohibitions on trading the company stock and related party items.
Our Bermuda environment has both private and public companies.
Two utility companies and three banks, HSBC Bermuda, Butterfield Bank, and Bermuda Commercial Bank are publicly owned with their shares listed on the Bermuda Stock Exchange while Capital G Bank is privately owned. Two of four insurance companies,
Argus and BF&M are publicly owned, while Freisenbruch Meyer and Colonial Insurance are held privately.
Next, the IPO launch frenzy will the small investor even have a fighting chance to own Facebook? Where and how are the shares are traded? Should you jump in to buy as a small investor? How do you find enough information? Beware concentration of risk. Tales of triumph and tribulation of instantaneous wealth interposed with delisted tech stocks.
n The informational article above is for general educational use only. It is not to be taken as specific individual financial advice. It is recommended that you consult a qualified financial professional for assistance with your personal finances.
Martha Myron, CPA CFP (US) TEP JP www.marthamyron.com is an Certified Financial Planner™ providing Financial Counsel for Cross Border Living™ on international tax, estate, and retirement strategies for Bermuda residents with US connections, and US citizens living and working abroad. Member of the American Citizens Abroad Tax Advisory Council. www.americansabroad.org Contact mmyron[AT]patterson-partners.com or 296 3528 at Patterson Partners Ltd.
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