Posted by Tom Foremski - March 7, 2012
Facebook has added 25 banks to its IPO offering — a massive expansion from the original six banks named. It allows the banks offer Facebook stock to their clients in special deals and spreads a lot of favors among the Wall Street investment community.
David Benolt in The Wall Street Journal, reported:
The social networking giant has just added five more lead investment banks to its IPO from the original six, according to an updated filing. On top of that, Facebook added another 20 investment banks that will get a piece of the action.
The move is the opposite to Google’s IPO, which shunned Wall Street banks as much as possible.
In the lead up to its IPO, Google reduced the number of banks involved, cutting Goldman Sachs. That left just Morgan Stanley and Credit Suisse First Boston to offer shares through a very rare and unusual IPO, using a Dutch auction process.
This was carefully designed to cut out Wall Street banks and create a level playing field where the IPO shares were available to small and large investors.
Larry Page wrote in his Founders’ Letter (he highlighted this passage in italics to stress its importance):
It is important to us to have a fair process for our IPO that is inclusive of both small and large investors. It is also crucial that we achieve a good outcome for Google and its current shareholders. This has led us to pursue an auction-based IPO for our entire offering.
Auction did not disrupt Wall Street
However, Google’s attempt to disrupt Wall Street’s normal IPO practices with its auction, and its refusal to include more investment banks, was not successful.
Google faced a big problem in that it had to persuade existing shareholders to offer up enough shares to create a decent sized market but the offer price was uncertain and so the numbers of shares available became uncertain too.
The result was that Google was forced to cut its offering price before the IPO and the size of the offering because the auction process did not meet existing shareholder expectations on price.
Google failed in its goal of achieving “a good outcome for Google and its current shareholders.”
Facebook isn’t willing to take a similar risk and leave money on the table.
By including so many banks in its IPO, it’s making sure that small and large banks, rather than “small and large investors,” as in Google’s case, have access to its IPO shares and that this method will bring a better price for its existing shareholders.
Google wanted to have a fairly large float of shares so that it would discourage speculators. In its S-1 filing, Mr Page wrote:
Many companies going public have suffered from unreasonable speculation, small initial share float, and stock price volatility that hurt them and their investors in the long run.
Here again, Facebook has chosen the opposite strategy: it reduced the number of shares offered by one half – it now has a much smaller initial share float than initially planned.
This smaller share float is guaranteed to increase volatility and produce a high initial valuation. With smaller numbers of shares distributed among a larger group of banks demand will far exceed supply.
GOOG$ shares went out at $85 and closed the day at $100.34.Tweet this story Follow @tomforemski
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