FACEBOOK IPO – 12 years in the making?

In one of our previous articles I alluded to former presidential hopeful Newt Gingrich who in his campaign rhetoric had touched upon his intentions to repeal the Sarbanes-Oxley (SOX) Act of 2002, which was passed in the wake of several high-profile financial scandals. The United States of America has chosen to codify a significant part of its corporate governance in an Act of congress known as the Sarbanes- Oxley Act (SOX).

His primary arguments in favour of repealing the Sarbanes-Oxley (SOX) Act of 2002 focused on painting the regulation as a deterrent to a free market economy asserting that an average company now took 12 years before it could successfully issue an Initial Public Offering (up from five years pre-Sarbanes-Oxley) because they did not have enough capital to cover the estimated $4.36 million hidden tax in yearly compliance costs.

In the media frenzy surrounding Face book’s Initial Public Offering this week, my thoughts drifted back to Mr. Gingrich’s protracted timeline and I wondered if the Facebook Initial Public Offering would be an applicable fit.

Well for starters, we know that the Facebook has been in operation now for 8 years, formed at some point during 2004. This represents a 4 year shortfall with respect to the timeline offered by Mr Gingrich. We also know that Mr. Zuckerberg had been reluctant to push forward with an Initial public offering fearful of the damage that the IPO could do to the company’s culture with employees becoming increasingly distracted by the stock price as opposed to focusing on product development.

Regulatory forces however intervened and slowly started to force his hand over the last couple of years. Facebook executives began to realize in 2010 that Facebook would have more than 500 shareholders by the end of 2011, which would trigger a regulatory requirement that Facebook start publicly reporting financial information. Mr. Zuckerberg decided it made more sense for Facebook to go public and reap some financial benefit from an IPO, rather than stay private but have to release its financial information, said those who were familiar with his thinking.

This, by implication means that within a period of approximately 2 years the IPO filing was finalised. One can also argue that the $4.36 million hidden tax in yearly compliance costs were never going to be an issue given that the company’s revenue was in the region of approximately USD $ 3.7 billion for 2011 alone. In reality, Facebook has benefited from sporadic private equity injections during its brief 8 years of operation duly nullifying the traditional arguments in favour of an IPO in the form of bolstering and diversifying a companys equity base and duly enabling cheaper access to capital – the irony being that the very regulation that was meant to hinder the IPO actually triggered the filing. Admittedly Facebook is no average company and my continued search for a fit to Mr Gingrich’s protracted timeline will necessitate a deeper investigation into a swathe of more faceless organizations.

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