Shares of the social saving site Groupon (GRPN), business networking site LinkedIn (LNKD) and social gaming company Zynga (ZNGA) jumped on Thursday, February 2. It was less than 24 hours after Facebook filed its IPO prospectus, and the increases were undeniable. Zynga leaped over 17%, Groupon, almost 8% and LinkedIn roughly 6%. By the end of trading this past Tuesday (Feb. 7), the increases enjoyed by these stocks had fallen slightly but remained elevated. The $7.79-billion market cap LinkedIn grew almost 4% from the beginning of trading Thursday to the end of the trading day Tuesday. The $15.58-billion market cap Groupon increased almost 2% and the $9.36-billion market cap Zynga was up over 3%.
While other tech companies were not so lucky, there were increases across the board in the industry since Facebook's IPO was filed. Google (GOOG), which is a favorite pick of Stephen Mandel's Lone Pine Capital, has a $193.89 billion market cap and offers the social components Google Plus and Google Currents, and it went up nearly 2%. Baidu, Inc. (BIDU) rose less 1% from the open of trading Thursday to the close of trading Tuesday, AOL Inc. (AOL) fell over 2% and Yahoo (YHOO) moved less than 1%.
On the one hand, there has been a lot of enthusiasm in the tech sector recently. According to data from IPO advisory firm Renaissance Capital, the tech sector saw 41 IPOs in the first 11 months of 2011, with an average first-day increase of 20.3%. The current bullishness in the tech sector could spell good things for a Facebook IPO. On the other hand, "Selling begets selling," said Paul Bard, a director of research at Renaissance Capital. "In the environment we're in right now, investors are wary of risk, and so these less-seasoned companies will naturally face more selling pressure." The same is true in the reverse - buying begets buying and investors wary of risk will seek out companies that they believe offer the least amount of risk for the greatest reward. But there could be other forces at work here.
Facebook has its hands in a lot of pies, and that includes tech companies. For instance, Zynga's games accounted for roughly 12% of Facebook's revenue last year. As far as LinkedIn goes, as of November 3, 2011, it had over 135 million users. While LinkedIn is a separate social network from Facebook, a fair portion of its users have their accounts linked to their Facebook profiles. Groupon had over 115 million users as of August 5, 2011, most of which are connected to Facebook in some way. As such, the success of Facebook contributes directly to the success of these tech companies and bullishness over Facebook feeds into their recent increases. In any case, the increase in share price for Zynga, Groupon and LinkedIn is welcome. From its debut through the end of trading Tuesday, LinkedIn shares were 15.37% lower while Groupon shares dropped 9.96%. Zynga was an exception, ending Wednesday up over 34% since its IPO. Chase Coleman's Tiger Global Management recently reported a 9.1% stake in LinkedIn.
The only question is whether the trend will continue in time for Facebook's IPO, which is expected sometime in April or May. Of course, there is a chance that the trend may not be a main factor in Facebook's success.
Confidence in Mark Zuckerberg, the founder of the social networking giant, could weigh more heavily on Facebook's success than price fluctuations within the tech sector. According to Facebook's IPO prospectus, Zuckerberg will retain control over the company's operations. All in all, Zuckerberg has control over 28.4% of Facebook's Class B shares (each Class B share is worth 10 votes whereas Class A shares are worth only one vote each), and voting agreements with other Class B shareholders give him control over an additional 30.6% of Class B shares.
Also, under the prospectus, the directors of Facebook will be selected by the board itself; Zuckerberg is in charge of appointing board members and he reserves the right to remove or replace members at any time. This two-share-class, voting-rights structure is unique, but not unheard of. Google founders Larry Page and Sergey Brin used a similar structure when setting up Google - so did Andrew Mason at Groupon, Mark Pincus at Zynga and Reid Hoffman at LinkedIn. The difference here is that Page and Brin have equal control and neither Mason, Pincus nor Hoffman have the right to remove or replace directors at will.
Investors in Facebook will have to decide whether Zuckerberg, who has been at the helm and gotten the company this far, is capable of wielding this sort of control in a way that will increase shareholder value enough to make investing in Facebook's IPO worth the risk. In the meantime, the higher LNKD, GRPN and ZNGA climb, the more bullish (read:receptive) the market will likely be to Facebook's IPO. However, investors should keep in mind that for as many analysts chomping at the bit to get a piece of Facebook, there are those, like Jim Rogers, who say the stock will be too expensive - and that could certainly happen, either through the price being driven up through momentum surrounding the IPO or by Zuckerberg and his team. They are going to price Facebook at what they think will work and what their advisors advise them.
In the case of Facebook, it has Morgan Stanley (MS), JPMorgan Chase (JPM) and Goldman Sachs (GS) as underwriters. It may sound like an all-star line-up but this is the exact team that underwrote AVG Technologies (AVG), a Dutch antivirus software maker whose IPO was last week, and thusly buried under news of Facebook's IPO. It opened trading on February 3 at $13.43 only to end trading on Tuesday at just $13.01 a share. The highest the stock traded for was $13.50, a high reached within minutes of trading opening.
As far as investment in the rest of the tech sector, investors need to keep a wary eye on news about Facebook - the more bullish the market grows over Facebook's IPO, the higher social tech stocks like LNKD, GRPN and ZNGA will go. Like speaks to like. Many investors will see factors in social tech stocks that are reminiscent of Facebook or use Facebook in some way, and they will invest accordingly. Other tech stocks, like AOL (AOL), YHOO and GOOG, will flounder or be reliant on their own news. For instance, YHOO's recent naming of two industry vets to its board will likely boost its share price but news about Facebook will not have an effect.