Some of the most-hyped Internet companies in the world are trying to stay private, longer.
Companies such as Facebook Inc. - which has long sparked privacy concerns on behalf of its 550 million users - are declining multibillion-dollar takeover bids and refusing to launch initial public offerings.
The social networking site this week accepted $450-million (U.S.) from Goldman Sachs Group Inc. in a deal that will see potentially thousands of individual investors obtain shares on the secondary market - all while Facebook technically remains a private company.
Micro-blogging site Twitter Inc. and the wildly popular online coupon company Groupon Inc. - which recently rejected a $6-billion bid from Google Inc. - are taking the same route, raising big money away from the glare of the stock market.
There are sound reasons for these tech firms to remain private, including the chance to polish business models for monetizing their sites without the scrutiny of competitors, and the ability to firm up long-range business plans without worrying about short-term revenues.
"If you're focused on quarterly reporting, and all these other reporting requirements, I think you lose track of the long-term goals and the long-term objectives and the long-term planning," says Jim Goodnight, chief executive officer of SAS Institute Inc., a global software company with more than 11,000 employees that he has kept private for more than 30 years. "I suspect that as the economy picks up, you will see a few more companies doing IPOs. But then, you look at Facebook, Twitter and Groupon; all those companies are managing to stay private."
With Facebook, Goldman is planning to resell shares to high-net-worth clients, claiming the investment firm is a single investor. But since U.S. law requires companies with more than 500 outside individual investors to effectively go public, the Securities and Exchange Commission may eventually force the company to go public anyway.
But in the meantime, Facebook founder Mark Zuckerberg can continue to avoid the onerous reporting requirements that apply to public companies.
One of the things relieving the pressure to go public is a vibrant secondary market in the U.S. for Facebook's pre-IPO shares, something that doesn't really exist in Canada, according to Tom Valis of Toronto's Celtic House Venture Partners. "That's one of the reasons why Facebook isn't under pressure to go public," Mr. Valis said.
Other tech firms, including Twitter, LinkedIn and Zygna Inc. (the creator of the popular FarmVille game), are also private despite furious trading in the secondary market.
Competitors know little about their metrics - in some cases, revenue and profit, though in others how the company makes any money at all. And that's a relatively new development.
Duncan Stewart, director of research at Deloitte Canada, says before the dot-com bubble burst a decade ago, tech IPOs came to market only after huge investments in infrastructure or software development and several years of operation, which allowed competitors to get a feel for rivals.
"When you went public, and you had to disclose a whole bunch of stuff, usually your competition already knew that stuff about you," Mr. Stewart said. "[But for]Facebook, Groupon - these kinds of companies are so, so new and emerging and evolving so rapidly, that … staying private may be more of a strategic advantage for these guys."
Groupon's rejection of Google's $6-billion bid, has, however, raised the prospect of hype-fuelled valuations. Goldman's financing values Facebook as high as $50-billion, and Google, which launched at roughly $85 (U.S.) a share in 2004, closed at $602.12 on Tuesday. Groupon, however, has been criticized for a business model that is too easily replicated, and Twitter hasn't revealed how it will make money from its millions of users.
National Bank Financial Inc. analyst Kris Thompson, who follows small tech companies, is not too concerned about the lack of information. This time around, he said, there is unlikely to be the same sort of capital destruction as there was 10 years ago.
"Investors got burned last time around," he said. "There's not as many companies chasing the same thing. The business models are a lot more well thought out."Report Typo/Error
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