News Column

Facebook Outlines IPO's Perils

February 3, 2012

By Scott Martin and Jon Swartz

Facebook IPO

Facebook's stock may not be your BFF. The social-networking giant on Wednesday spelled out shareholder risks in its proposed initial public offering. It hopes to raise at least $5 billion by selling shares to the public. Among potential threats to Facebook's stock value, the company named competition from Google for users and ad dollars, the need to attract mobile ads, and the possibility of privacy breaches of members' information.

Facebook's stock is expected to begin trading in May under the ticker symbol FB in what will likely be the largest-ever Internet IPO.

"I counsel caution," says Renaissance Capital principal Kathleen Smith.

Google's business tentacles -- including search, mobile software and its Chrome browser -- could help propel its Google+ social network. Facebook warns that could, in turn, draw members and advertisers away from its own site.

The considerable hype that surrounds the planned stock offering is tempered by several other red flags revealed in Wednesday's filing with the Securities and Exchange Commission:

Mobile. Of all the risks mentioned, this could be Facebook's kryptonite. Though half of its 845 million members are mobile users, Facebook acknowledged it has yet to take advantage of mobile ad sales.

Advertising accounted for 85% of Facebook's revenue last year, and advertising's share of total revenue has declined the past few years.

"Growth in use of Facebook through our mobile products, where we do not currently display ads, as a substitute for use on personal computers may negatively affect our revenue and financial results," the company warned.

Twitter and Microsoft, which Facebook also names as competitive threats, are going after the same advertising dollars. The shift to mobile devices and apps will "likely intensify," says Bob White, an attorney who closely follows IPOs.

Phishing scams. Because of the company's prominence, Facebook in its filing says, "We believe that we are a particularly attractive target for such attacks," in which thieves use e-mail to trick people into giving up personal and financial information.

Privacy concerns. And a stock shock is just a malevolent exploit away in the form of a massive privacy breach. Financial results could be affected by "system failures or breaches of security or privacy," it said.

Cyberattack. Hackers could unleash an attack on its network like the data breach in April that exposed the personal information of more than 77 million users on Sony's PlayStation Network. That crushed business there in April, for example.

Yet, perhaps ironically, CEO Mark Zuckerberg embraced a hacker lifestyle at Facebook in his shareholder letter.

"We have cultivated a unique culture and management approach that we call the Hacker Way," he wrote.

Facebook, which is in its IPO quiet period, declined to comment.

Source: Copyright USA TODAY 2012

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