There’s a beautiful image in social network Facebook’s regulatory filing for its planned $5bn flotation showing a world map lit up by number of its users and connections.
That Facebook has 845 million users and 100 billion ‘friends’ of interconnections between people in eight years of operation shows the power of its platform, which generated $3.7bn in revenue for the company last year (up from $2bn the year before) and net income of $1bn.
But the map also shows some dark areas where Facebook has failed to penetrate, most notably China (where RenRen is dominant) and Russia.
However, Facebook has some influence in these markets through one of its partnerships and minority shareholders, Russia-based internet holding company Digital Sky Technologies (DST), which subsequently split in February 2010 into a Mail.ru and DST Global entities following its first $200m purchase of Facebook shares in May 2009 at $4.54 each. (DST Global bought a further $50m of shares at $20.85 each in December 2010.)
The connection is laid out in Facebook’s regulatory filing as: "Mail.ru Group Limited and DST Global Limited have agreed, pursuant to the conversion agreement, that if either of their respective voting agreements with [founder and chief executive Mark] Zuckerberg is terminated because of his death or his failure to be actively engaged in our management, that they and their respective affiliates shall automatically convert their Class B common stock to Class A common stock."
Its unclear what "actively engaged in our management " means to DST but the Russian group owns about a quarter of local Facebook clone Vkontakte and has partnerships with emerging markets media groups Tencent and Naspers (that own shares in Mail.ru – for more on the links see previous profiles and analyses).
Until his death or it is no longer "actively engaged in our management", Zuckerberg has broad control on how the DST and Mail.ru shares are voted and prevents the company from "acquir[ing] any ownership of any of our [Facebook] assets or business".
Zuckerberg also effectively controls other shareholders in the same way and has perhaps the ultimate in so-called ‘poison pill’ limiting takeover attempts.
Facebook’s stock is split in A and B with one and 10 votes per share respectively. Zuckerberg controls 57% of the more numerous B shares and, through the voting agreements, a lot of the rest.
As Facebook in its filing says: "So long as the outstanding shares of our Class B common stock represent a majority of the combined voting power of common stock, Mark Zuckerberg will effectively control all matters submitted to our stockholders for a vote, as well as the overall management and direction of our company, which will have the effect of delaying, deferring or discouraging another person from acquiring control of our company."
But his control extends even further as if the B share is no longer the majority then provsions in its shareholder agreement means "the provisions of Delaware law, our restated certificate of incorporation and our restated bylaws may have the effect of delaying, deferring or discouraging another person from acquiring control of our company".
Investment bank Goldman Sachs, a shareholder in Facebook, is co-lead underwriting the initial public offering alongside Morgan Stanley and JP Morgan.
NB: line from filing…
"In 2004 and 2005, Mr. Zuckerberg’s father provided us with initial working capital. In consideration for this assistance, we issued him an option to purchase 2,000,000 shares, as adjusted for splits and reclassifications, of our Class B common stock. The option initially expired by its terms one year following the date of grant without having been exercised. Our board of directors (without Mr. Zuckerberg) determined that the option did not reflect the intent of the parties with respect to the equity to be issued to him in consideration of the financial assistance and a release from potential related claims. Accordingly, in December 2009, we issued an aggregate of 2,000,000 shares of our Class B common stock to Glate LLC, an entity owned by Mr. Zuckerberg’s father."