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For Facebook to justify $100 billion, Assistant Professor Anup Srivastava calculated that the company would have to show sustainable “super nova” profits. “To go from $1 billion to $12 billion in five years, it’s unlikely to happen,” Srivastava said.

Facebook to justify $100 billion the company would have to show sustainable “super nova” profits

Facebook IPO: Like or Dislike?

Professors Anup Srivastava and Craig Chapman evaluate whether the social network is really worth $100 billion

By Cheryl SooHoo

3/21/2012 - What will Facebook’s highly anticipated initial public offering really be worth?

That’s the multi-billion-dollar question two Kellogg School professors tackled before a packed crowd on March 9.

The talk drew a standing-room-only audience intrigued by the Internet social network’s goal to raise $5 billion for what would be an impressive stock market debut. If Facebook succeeds in reaching this target, the enterprise Mark Zuckerberg built might reach a valuation of about $100 billion — a major achievement.

View Anup Srivastava’s Facebook valuation tool

Assistant Professor Anup Srivastava kicked off the discussion by giving a spreadsheet analysis of Facebook’s much-talked-about 12-figure valuation. “I couldn’t find a single valuation model that explained where the $100 billion came from,” said Srivastava. “So let’s assume that it is a reasonable number and focus on what it will take to reach it."

Relying on Facebook’s recently revealed 2011 financials — revenue of $3.7 billion with a net income of $1 billion — and taking into account “reasonable” growth rates, operating expenses and revenue streams, Srivastava crunched the numbers. His best-case scenario? Twenty-five billion. For Facebook to justify $100 billion, Srivastava calculated that the company would have to show sustainable “super nova” profits for an increase in net income of $12 billion to $15 billion in the very near future. Said Srivastava, “To go from $1 billion to $12 billion in five years, it’s unlikely to happen.”

Assistant Professor Craig Chapman assessed Facebook’s motivations for going public, or, as he asked, “Why do they want your money?” After reviewing the company’s recent SEC filing, Chapman had several concerns, including:

Lack of clarity about the extra $5 billion. Noting Facebook’s current and seemingly healthy revenues, Chapman said the company hasn’t yet offered details as to why it needs more cash.

Unknown seller’s market for Facebook shares. Which shareholders will be offering up their ownership and why? According to Chapman, the type of seller could provide insight into those who are looking to jump ship.

Heavy-handed corporate governance. The dual class of shares that skew most of the voting power to the biggest shareholder — in this case, Zuckerberg — raises a red flag for Chapman. “When a company comes to an IPO, the owners are often asked if they want to be king or do they want to be rich. The individuals here seem to want both.”

While not “liking” Facebook’s chances of reaching a $100 billion valuation, Srivastava and Chapman agreed that the real answer to the company’s worth remains up to the potential investor to determine. Remarked Srivastava, “It’s hard to take out bias, but your role should be to look at the numbers in a dispassionate manner and decide.”