Facebook ad debate surfaces just before company's IPO
Responding to extraordinary demand, Facebook said Wednesday that it would sell more stock in the company's initial public offering. But ahead of the...
NEW YORK — Responding to extraordinary demand, Facebook said Wednesday that it would sell more stock in the company's initial public offering. But ahead of the IPO, a debate emerged between two of the nation's largest automakers: Does it pay to advertise on the social network?
General Motors, the nation's largest automaker, said it would abandon Facebook ads after concluding they were ineffective.
At the same time, Ford reaffirmed its commitment to Facebook, saying their relationship was stronger than ever.
The direct financial impact of GM's move is minimal for Facebook, but the decision drew attention to the network's advertising system, which some observers regard as immature.
In a regulatory filing Wednesday, Facebook said it would add 84 million shares, worth up to $3.2 billion, to the IPO, which is shaping up to be the decade's hottest. The company's stock is expected to begin trading Friday on the Nasdaq Stock Market under the ticker symbol "FB".
Almost half of the additional shares come from investment firms DST Global and Tiger Global. Goldman Sachs is doubling the number of shares it is selling. Facebook board members Peter Thiel and James Breyer are also selling more shares.
While the expanded IPO may mean the appetite for shares is strong, insiders' decision to pare holdings further may heighten some investors' concern over Facebook's earnings growth, said Greenwood Capital's Walter Todd.
"If the demand wasn't there, they wouldn't have upsized the deal," said Todd. "On the other hand, when you see insiders unloading their stakes, you start to wonder why. I could see it turning some institutional investors off."
"Everybody is cashing out," said Trung-Tin Nguyen, a hedge-fund manager at TTN in Zurich. "It's normal for private equities and venture capitals to cash out, but the obvious question is whether they are stretching it too far."
In papers filed with the Securities and Exchange Commission, Facebook said current shareholders are now offering approximately 241 million shares, up from about 157 million shares previously.
The market expects a substantial IPO "pop," or first-day price jump, said Josef Schuster, founder of IPO investment and tracking firm IPOX Schuster. But the overall stock market has been down in the last two weeks, and investor interest could flag quickly, he said.
"It may be rough waters for Facebook in the next few days, given that pricing has been up and up in a market that's been down and down," he said.
Facebook has more than 900 million users who log in at least once a month, but it makes only a few dollars per year from each one, chiefly through advertising. Advertisers have been complaining that it's difficult to make good use of Facebook.
A person briefed on GM's advertising said the company will stop running paid advertising on Facebook by midsummer because advertising agencies and third-party companies that reviewed the ads determined the company wasn't getting much back for its $10 million annual investment.
Time to adjust
The problem may not be just Facebook's. The advertising world is set up to take advantage of one-way media like magazines and TV, not two-way channels like Facebook, and may need some time to adjust.
Ford is taking the opposite tack of GM. It's set to increase spending on Facebook advertising this year, said Scott Monty, Ford's global head of social media. Ford sees the site as a way to build long-term relationships with customers, not just as an online billboard.
Ford complements display ads by sponsoring stories in the news feeds of people who subscribe to its pages. People see them in the area where their attention is focused, rather than in the right-hand column, Monty said.
It also buys ads that appear when a person logs out of Facebook, with images and descriptions of products such as the Ford Mustang, he said. He wouldn't say how much the carmaker spends with Facebook.
The value of Facebook ads, Monty said, can't be measured simply by the number of clicks they get from viewers.
"It's a holistic kind of a relationship thing rather than a single transaction we're looking for," he said.
Material from Bloomberg News
is used in this report.