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Social Networks Tempt Investors

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NEW YORK Networking sites have generated plenty of industry headlines over the past few years (think News Corp.'s acquisition of MySpace), and now it looks as if social networking could heat up the market for initial public offerings.

United Online, a provider of consumer Internet and media services, recently registered for an IPO of its Classmates Media arm, which operates networking site Classmates.com.

Wall Street observers believe Classmates could test the IPO waters for a couple of other big names: Facebook, which has emerged as the biggest challenger to MySpace, and the more business-oriented LinkedIn.

Add to that comments from the CEO of U.K. social networking powerhouse Bebo.com about a possible IPO, and one perceives the potential for a social networking feeding frenzy on the Street.

Amid the current global debt market jitters, some have suggested that IPO deal flow could slow as investors focus on conservative, known stock plays. Others point out that there has been little to no effect on the IPO market, which has sizzled this year but is on its traditional mid-August through Labor Day break as investment bankers go on vacation.

Observers also said a broader base of investors seems ready to embrace social networks, citing as evidence the networks' rapid growth and funding rounds by venture firms and rich individuals. A recent case in point: the $40 million raised by Ning, an online service that allows consumers to create their own social network "for free in seconds," according to its Web site. Netscape pioneer Marc Andreessen is one of its co-founders.

All the hype and early success will give some social network companies a shot at going public, said Cody Willard, a hedge-fund manager who specializes in telecommunications—though he also guaranteed "some spectacular flops." After all, even Google failed in the U.S. to gain traction for its Orkut social networking product.

Naturally, the highest-ranked social networks in terms of users are the ones with the most IPO buzz.

MySpace continued to dominate the networking space in July with a unique audience of nearly 61.3 million, according to Nielsen//NetRatings, which like Adweek is owned by the Nielsen Co.

News Corp. management has shown little interest in a spin-off of MySpace, though analysts have at times suggested the company could pursue that path to merge MySpace with a larger Internet firm.

Facebook ranked a distant second with 19.5 million but sported year-over-year growth of 129 percent (MySpace grew at a 33 percent clip). Classmates ranked third in unique audience (12.7 million), and LinkedIn was eighth (4 million).

United Online recently took the first steps toward taking Classmates public via a U.S. Securities and Exchange Commission filing, which didn't disclose the number or expected price range of shares to be offered in the IPO. However, the firm said it expects to raise $125 million at the most in a first estimate. It acquired the site in 2004 for $100 million.

Jefferies & Co. analyst Youssef Squali projected 33 percent revenue growth for Classmates' fiscal-year 2007 to $200 million and a 17.5 percent adjusted operating cash flow margin, which would bring cash flow to $35 million.

However, some have doubts that Classmates is a perfect trial balloon for social networking IPOs.

John Keeling, a senior vp with the Motley Fool investor service, said that while the site has "been fairly successful in building their community," his enthusiasm for the business is tempered because too many of its users lack a reason to visit the site daily.

Meanwhile, Facebook has impressed market watchers with strong user growth and regular additions to its list of popular tools for its clientele. Observers also have lauded the site for attracting an increasing number of business and professional users and more consumers in the 35-plus age categories than is usual for networking sites, which often skew younger. All this should mean growing advertising revenue.

As such, many Wall Street and Silicon Valley observers have suggested Facebook is likely to eye an IPO during the next year or two, and they have estimated the company's overall value to be in the billions of dollars—well above a reported $1 billion takeover offer from Yahoo Inc. that Facebook founder and CEO Mark Zuckerberg rejected last year.

"We're not looking to sell the company, and we're really not looking to an IPO anytime soon," he told The Wall Street Journal in late July. "Our board and we believe it's probably best to push some of these things off as long as possible."

Nonetheless, Silicon Valley detectives have argued this summer that the Palo Alto, Calif.-based company has at least started laying the groundwork for a stock market listing.

Case in point: In late July, Facebook hired former Yahoo and YouTube exec Gideon Yu to oversee its books, with observers saying he brings the skill set that a publicly traded firm needs.

Given Facebook's high profile these days, one Wall Street source predicted that if the firm does indeed opt for an IPO at some point, it would see the biggest level of investor interest in the crop of IPO contenders. "MySpace and soon Facebook are making a fortune," Willard added. He guesses Facebook's public float value on Wall Street will exceed $1 billion.

The Motley Fool's Keeling predicted that Facebook will not be doing an IPO until later. "It looks closer to a Craigslist. It's purpose driven and in no hurry to go public," he said. "They've created scale and a path to profitability, which is more attractive than their balance sheet."

Meanwhile, LinkedIn could be a well-received IPO, given the networking site for the business class is already profitable and projects $100 million in revenue next year.

The company, whose backers include venture firms Sequoia Capital, Greylock and Bessemer, has been priming for an IPO, recently hiring a slew of top executives, including CFO Steven Sordello, who exited TiVo to join LinkedIn. Before his brief stint at TiVo, Sordello was CFO of AskJeeves before it was sold to Barry Diller's IAC/InterActiveCorp and its name changed to Ask.com.

LinkedIn boasts many entertainment executives among its members and derives revenue three ways—subscriptions, advertising and fees paid by job recruiters.