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Wed 16 May 2012 09:58 AM

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Facebook boosts IPO size by 25%, could top US$16bn

Social network is expected to float about 422m shares in Friday's public offering

Facebook boosts IPO size by 25%, could top US$16bn
Facebook founder Mark Zuckerberg.

Facebook will increase the size of its initial public offering by 25 percent, a source familiar with the matter said, and could raise as much as US$16bn as strong investor demand for a share of the number one social network trumps debate about the company's long-term potential to make money.

Those concerns over revenue growth were underscored earlier on Tuesday, when General Motors said it planned to pull out of advertising on Facebook.

Facebook, founded eight years ago by Mark Zuckerberg in a Harvard dorm room, will add about 85m shares to its IPO, floating about 422m shares in an offering expected on Friday, the source told Reuters, declining to be identified because the information was confidential.

The expanded size, coupled with Facebook's recently announced plans to raise the IPO price range, would make Facebook the third-largest initial share sale in US history after Visa and GM. Facebook declined to comment on the increased IPO size, which was first reported by CNBC on Tuesday.

The social networking company is drumming up massive demand for the offering even as slowing revenue and user growth spur questions about the long-term Facebook story.

"This is much more a spectacle, a media event and a cultural moment than it is an IPO," said Max Wolff, an analyst at GreenCrest Capital. "This is not a game of models and fundamentals at this point."

GM's announcement, while ill-timed, should not seriously hurt Facebook's IPO reception for now as it may not be representative of advertisers' overall attitude, said Brian Wieser, an analyst with Pivotal Research Group. "The demand for the IPO probably won't be affected materially by this," he said, noting, however, there were probably a lot of calls between underwriters and investors following GM's announcement.

The IPO, Silicon Valley's largest, eclipses the roughly US$2bn debut by Google in 2004.

Facebook raised the target price range to US$34-US$38 per share in response to strong demand, from US$28-US$35, according to a Tuesday filing. That would value the company at US$93-US$104bn, rivaling the market value of Internet powerhouses such as Inc, and exceeding that of Hewlett-Packard Co and Dell Inc combined.

The increased price range made it very unlikely that Facebook shares would double on their trading debut as they might have if the company had come out at the low end of its initial price range, Wolff said. He expects a first-day gain of about 10 percent.

"No rational person thought they were buying the stock for US$28," said Wedbush Securities analyst Michael Patcher, noting Facebook had traded as high as US$44 in the secondary markets in recent months.

Facebook said in its latest filing that it arrived at the higher IPO price range after one week of marketing the offering - part of a cross-country roadshow in which CEO Zuckerberg has taken the stage to lay out his vision for the company's money-making potential and its top priorities.

The price range hike, coupled with strong results from Internet and social media players Groupon Inc and China's Renren Inc, contributed to a dotcom rally on Wall Street on Tuesday. Shares of Pandora Media Inc rose 10.3 percent, Zynga Inc was up 7.7 percent, Groupon climbed 3.7 percent and Renren gained 6.4 percent.

Before the IPO size was increased, Facebook would have raised about US$12.1bn based on the midpoint price of US$36 and the 337.4m shares on offer originally.

At this midpoint, Facebook would be valued at roughly 27 times its 2011 revenue, or 99 times earnings. Google went public at a valuation of US$23bn, or 16 times its trailing revenue and 218 times earnings. Apple Inc went public in 1980 at a valuation of 25 times its revenue and 102 times earnings.

Facebook's IPO comes as some investors worry the company has not yet figured out a way to make money from a growing number of users who access the social network on mobile devices such as smartphones. Meanwhile, revenue growth from Facebook's online advertising business, which accounts for the bulk of its revenue, has slowed in recent months.

With some 900m users, it had US$1bn in net income on revenue of US$3.7bn in 2011.

The company has also extended the time frame for its US$1bn acquisition of mobile app maker Instagram, projecting the deal would close this year instead of the second quarter as it previously indicated.

It provided no reasons, though a source familiar with the matter told Reuters last week that the U.S. Federal Trade Commission has reached out to Google and Twitter as part of the agency's standard review for deals of that size.

Facebook is scheduled to price its shares on Thursday and begin trading on the NASDAQ on Friday. A host of Wall Street banks are underwriting the offering, with Morgan Stanley, JPMorgan and Goldman Sachs serving as leads.