Surging Facebook profits spark talk of flotation next year

Social networking phenomenon Facebook is generating profits at afaster-than-expected pace as speculation intensifies over a possiblestock market flotation next year.

The US-based website, which this week raised almost dollars 500million (GBP321m) from Goldman Sachs and a Russian investment firm,will probably attract so many investors this year that it will haveto disclose financial data similar to a publicly traded company byApril 2012.

The move could set the stage for an eagerly-anticipated marketlisting later in 2012, analysts say.

It comes amid talk that LinkedIn - another fast-growing socialnetworking site, this time aimed at business people - will go for aninitial public offering (IPO) later this year.

There is no guarantee that Facebook, which was founded by 26-year-old computer whizz-kid Mark Zuckerberg, below right, willchoose to sell shares to the public simply because it is pushed intoopening its books.

Eyebrows have been raised at the valuation put on the website -some dollars 50 billion and growing - relative to its revenues.

Documents that Wall Street investment giant Goldman Sachs hasprovided to its clients suggest that Facebook made a net profit ofdollars 355m in the first nine months of 2010 on sales of dollars1.2bn. Most of the firm's revenues are generated through advertisingand the ability to translate those into healthy profits is crucialto its future viability.

Launched from a Harvard dormitory room less than seven years ago,Facebook has gone on to attract more than 500 million users, whoseinteracting habits and interests are attractive to potentialadvertisers.

Goldman Sachs is looking to sell dollars 1.5bn of shares in thenetworking behemoth and has begun circulating copies of a 101-pageprivate placement memorandum to its wealthy clients.

An accompanying six-page financial statement is said to providesome of the most detailed financial information yet about Facebook.

Ryan Jacob, of the Jacob Internet Fund, said the currentvaluation was high but not outrageous based on the glimpse into thecompany's financial performance and the growth potential for thebusiness.

"It just shows you that these businesses can generate 30 per centto 40 per cent, potentially, operating margins," he said. "They[Facebook] probably did at least dollars 500m in net income [profit]in 2010."

Wedbush Securities analyst Lou Kerner, who owns Facebook shares,said: "The revenues kind of are in line with our expectations. Thesurprise was on the profitability.

"I think it highlights that Facebook is likely to have marginsthat are going to exceed Google's margins."

The financial statements circulated by Goldman were not auditedand offered little detail about how Facebook, which employs some1,700 people, actually generates its revenues, noted one customer ofthe bank.

Investors appear increasingly eager to buy shares in Facebook andother fast-growing social networking websites on private exchanges.

US market regulations require companies with 500 or moreshareholders to disclose certain financial information to thepublic.

LinkedIn, with its 85 million or so users, could register for anIPO in the first quarter of this year, reports this week havesuggested.

A spokesman for the website said: "An IPO is just one of manytactics that we could consider."

LinkedIn's investors include Sequoia Capital - the venturecapital firm that has backed Yahoo, Google and Cisco Systems -Greylock Partners, Bessemer Venture Partners and Goldman Sachs.