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Facebookcase Essay

898 words - 4 pages

Long-Term Financing at Facebook[1]

Facebook is the social networking website that opened in 2004 as a forum for university students, and that has exploded into a full-service social networking site open to all interested participants by the end of 2006. Facebook competes as a social network with the site, MySpace, which itself only began operating in 2002. The main audience for Facebook remains college students, in the age 18-24 range, though by early 2007 more than half of Facebook’s 24 million active users were outside of college age.

Facebook’s stated intent is to provide a forum for “real” people (not avatars) to share information about each other, without ...view middle of the document...

In 2007 Facebook launched a service called Facebook Platform, which allows external developers to develop applications for the site just as if they were employed by the company itself. This expands the possibility of creating new and useful applications enormously, and may lead to greater competitiveness relative to MySpace and other sites. (http://developers.facebook.com/)

In August 2007 Facebook was looking for financing to cover the cost of its development of a more user-friendly interface for members on the internet. The company expects that this project will be ongoing for at least two years, through initial development and launch, plus upgrades. The total cost is expected to be on the order of $US 75 million.

Facebook has been consulting with various banks to try to understand the alternative financing methods available. Barclays Bank in New York has offered a euro-currency financing package that would include funds in any currency chosen by Facebook, with an interest rate of LIBOR plus 1.0 percent per year. The company would pay the interest semi-annually, and the full principal at maturity in 2 years.

Additional financing possibilities that have been mentioned include the issue of stock shares through an initial public offering in the US stock market, and issue of bonds either in the US or the euromarket. Relevant rates on these sources of funds appear in Table 1 below.

Given the fact that Facebook has no idea if it will be generating foreign currency income in the future, it is not excited about running any exchange rate risk. Nevertheless, the Barclays Bank lender was able to convince Facebook's Treasurer to at least consider foreign currency financing alternatives. The attached quotes from Barclays Bank reflect the current interest rate and exchange rate choices available to Facebook.

Table 1

Facebook Funding Alternatives

Source of funds interest cost# fees
(paid in
US$ yen euro £ SF advance)
-----------------------------------------------------------------------------------------------------------------
2-year euroloan from Barclays
Bank, based on LIBOR see attached...

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