Baltimore's T. Rowe Price is a significant investor in Facebook
Facebook filed paperwork Wednesday to allow it to go public this spring, a deal being closely watched internationally — and especially at Baltimore's T. Rowe Price Group, which holds a stake of about $400 million in the social-networking behemoth through its mutual funds.
The initial public offering, known as an IPO, is expected to be one of the largest in the nation's history. Facebook said in U.S. Securities and Exchange Commission documents that it hopes to raise $5 billion and revealed that it made $1 billion profit last year.
The 483 million people who use the site every day to keep up with friends, promote businesses, organize events and pass the time total well more than the entire U.S. population. Include the people who visit at least once a month, and Facebook's user numbers are at nearly 850 million.
"Likes" and comments add up to an eye-popping 2.7 billion — per day.
Though the eight-year-old Facebook is privately held now, big investors have been able to get a piece of it long before the planned IPO. Money manager T. Rowe Price is one of the largest holders of Facebook's Class A shares, with a 5.2 percent stake. It also owns more than half a percent of the company's Class B shares, which come with greater voting power.
T. Rowe Price spokeswoman Heather McDonold said the investments made by 19 of the company's mutual funds were worth nearly $408 million as of the end of last year. That's up substantially from T. Rowe Price's $190.5 million initial investment in the company last spring. But that isn't all. The Facebook prospectus says T. Rowe Price's stake includes shares held in accounts it manages for clients — amounts the company does not have to disclose.
McDonold said the company would not comment on its Facebook plans, but T. Rowe Price has never been the buy-and-sell-quick type.
"We are long-term investors, and when we make investments, it's with an eye toward the long-term value we can deliver to clients," McDonold said.
Facebook's IPO is expected in May. So, final pricing for its shares won't be set for months, and the size of the IPO could increase with investor demand.
Facebook selected Morgan Stanley, which handled the IPOs of Internet companies Groupon and Zynga, as its lead investment bank for the Wall Street launch.
The IPO will create enormous wealth in Silicon Valley, with more than 1,000 new millionaires among the company's 3,200 employees. Now the frenzy to own a piece of Facebook, already off the charts on private trading exchanges, promises to spread to rank-and-file investors.
It's often only high-net-worth investors who have a chance to buy shares through a hot IPO, said Lyle Benson, president of L.K. Benson & Co., a financial planning firm in Towson. Shares are divvied up to certain brokerage firms, and those firms do not make them widely available, he said.
But Internet companies haven't always gone that route. When Google went public, it used a Dutch auction, meaning the public had a better shot at buying the stock before the shares began trading, rather than just the investors handpicked by the investment bankers.
Benson, a personal financial specialist, said some clients have expressed interest in buying into Facebook. His advice: Keep in mind that some companies' stock price falls after the IPO and never claws its way back.
"For the average investor … this is probably more sensationalist news than it is an investment strategy," he said. "I think a reality check is really good. Because it does sound great — it's a great story for the company in general. … But the people that are really going to make money are the insiders."
As for T. Rowe Price, it's a wait-and-see game, said Katie Reichart, a Morningstar analyst who follows the company's mutual funds. She thinks there is "some potential" in the investments. But because they come to small percentages of total fund holdings — 1.2 percent of the Media & Telecommunications Fund and less in all the rest — they can only have so much effect.
"It's probably not going to really make or break any of the funds," said Reichart. "There's a lot of hype about the Facebook IPO. It's crazy. You have to take a look at some other IPOs like Groupon that haven't necessarily … met expectations."
Legg Mason, Baltimore's other large money manager, said Wednesday that it does not hold Facebook shares in its mutual funds.
Facebook's dual-class stock structure means CEO Mark Zuckerberg clearly will hold the reins of the company after it goes public. He alone has more than half the company's voting power now. The company said it expects that he will sell some stock, largely to cover the tax implications of exercising stock options to buy more.
Zuckerberg has a big piece of the company's Class B shares, which get 10 votes each. Only the one-vote-each Class A shares are being sold through the IPO.
In a letter included with the filing, Zuckerberg said he didn't start Facebook in his Harvard dorm with the intention of making money. He said it should be viewed differently from other public companies.
"Simply put: We don't build services to make money; we make money to build better services," he wrote. "These days I think more and more people want to use services from companies that believe in something beyond simply maximizing profits."
But its SEC documents suggest that Facebook's profits are rising fast — up 65 percent in the past year alone and more than four times what they were in 2009.