7 Feb 2012

Facebook’s IPO and the Google factor

I’ve read lots of speculation about Facebook’s initial public offering, since news of the $5bn share issue was announced last week. Because it’s the biggest IPO since Google went public in 2004, the two companies are being directly compared, even though their business models at the point of flotation have substantial differences. Perhaps surprisingly, Facebook is not only a much bigger overall business than Google was at IPO, it’s also arguably more mature and better diversified.

There were lots of naysayers at the time of Google’s offering, who have since been forced to swallow uncomfortable servings of humble pie. And now there are plenty of Facebook sceptics arguing that the stock will be overvalued – although it seems a few former Google pessimists are betting the other way this time around in the hope that history will prove them half right.

In 2004, sceptics were fond of bashing Google by pointing out how transitory success might be in the search engine industry. They had the handy example of Alta Vista, which had dominated the business of connecting visitors to websites immediately prior to Google’s arrival.

Alta Vista surrendered its enviable position through what proved to be bad decisions and a seeming lack of vision. It was reasonable to suppose that Google might do the same, opening the door for another, smarter company to move in and leave Google stockholders with empty wallets. Instead, of course, Google’s stock has improved almost six-fold since its IPO.

As we now know, Google’s management proved to be very canny about taking the business in profitable directions without losing sight of what made it popular in the first place.

It seems to me that Facebook has already shrugged off its own ghosts – in the shape of former social media stars like MySpace. Its management has amply demonstrated that it can grow and generate new revenue streams without alienating its audience.

From what I can see, the comparison with Google at IPO time falls quite strongly in Facebook’s favour.