February 17, 2012
Facebook Inc., one of most popular social networking companies, is now in a quiet period where federal rules limit what company executives can say in public after it filed paperwork on Feb. 1 with the Securities and Exchange Commission (SEC) to raise $5 billion in an initial public offering (IPO).
The social networking site is just beginning a months-long effort that involves appeasing regulators, wooing investors, and dealing with endless amounts of paperwork before starting its stock market debut. While it will follow a familiar IPO pattern, this high-profile offering is under a microscope. In addition to SEC scrutiny, a high degree of interest is expected to come from the press, the blogosphere, and the investment community.
When arriving in the SEC’s computers, Facebook’s S-1 filing made its way to the Division of Corporation Finance and the desks of a lawyer and an accountant who specialize in the industry. These staffers will go through the document page by page, noting anything that might mislead potential investors, need more supporting evidence, or warrant further explanation. They bring their recommendations to a more senior lawyer and accountant who complete the SEC’s first comment letter, which typically lays out 50 to 100 queries that the company must address.
The SEC may challenge various aspects of the filing. Questions about how companies track and count their users have come up in several recent Internet initial public offerings. The issue could arise with this social networking site, which boasts 845 million active monthly users.
The regulators also scrutinize corporate governance and accounting policies. One issue that may come up in the Facebook review is the power that founder and CEO Mark Zuckerberg, will have once the company is public. Zuckerberg will control 56.9 percent of voting rights at the social network under the terms of the current filing.
Once the SEC completes its comment letter—usually within 30 days of the filing—it will e-mail it to Facebook’s CEO with a copy going to Facebook’s lead outside counsel. Within minutes it’s in the hands of anyone who has involvement with the transaction.
Facebook’s Chief Financial Officer David Ebersman is in charge of getting the IPO done. He’s managing a team that includes Morgan Stanley bankers, accountants from Ernst & Young, and Facebook’s and Morgan Stanley’s lawyers.
Usually IPO teams set up shop at the offices of a financial printer. Financial printers do much more than prepare deal documents. They now offer full-fledged meeting spaces with 24-hour staff, catering services, and rooms to take a catnap. Sitting around the table, laptops open, the team writes a response to the comment letter, question by question. People barely leave the conference room and often eat all their meals there.
Facebook may push back on some SEC requests, hoping to shield confidential information. Executives can pick up the phone to call the agency’s examiners or take their concerns to a more senior official if need be. Typically most of the issues can be resolved. Still, the SEC has the final word, so a Facebook might have to cave and put something in the document that you prefer not to. Companies and the SEC can go back and forth six or seven times over two to four months. Over time, the number and complexity of the comments shrink—a signal that the agency is getting closer to approving the offering.
While Facebook and its banks conduct their dialogue with the SEC, they will also start creating a slideshow and marketing materials for the roadshow, where Facebook execs will play the role of traveling salesmen, hop scotching across the country to meet with major investors and entice them to buy the stock. Executives generally practice their presentations to refine the pitch. Bankers—and sometimes outside consultants—pepper management with challenging questions that might be asked by prospective investors. Even a hot company like Facebook has to have a persuasive story line. The bulk of the company’s presentation would be to convince investors that the growth is not in the rearview mirror but rather out in front.
Roadshows typically kick off at the lead bank’s offices, where the company’s CEO revs up the bank’s sales force. That’s followed by a series of hour-long, one-on-one meetings with institutional investors such as mutual funds, hedge funds, and pension funds. There may also be group lunches for smaller investors.
Once the roadshow starts, all the banks participating in the offering open their order books so clients can tell them how much stock they want to buy and at what price. In the case of Facebook, where demand is expected to far outstrip supply, the problem for the banks won’t be finding enough customers but allocating shares in a way that will keep their best, revenue-generating clients happy. It’s expected to see a lot of people jockeying to get allocations.
Immediately after the final roadshow session ends, bankers and company executives sit down to set a price for the stock, which starts trading the next day. There’s an art to the pricing. Along with raising money, company wants investors who won’t flip the stock. It would love to have the stock trade up on the first day or days and then stay at that level. Those are the headlines that company is seeking. The financial printer drops the pricing into the final revised prospectus and uploads the documents to the SEC.
That same night the company signs underwriting agreements with its banks that it has been negotiating over the previous months. The banks buy the stock before turning around and selling it to clients. To minimize the risk of getting stuck with unsold shares, they may ask for escape clauses. To protect against investor lawsuits, they often want the contracts to include assurances that the company’s accounting is truthful.
In the past, banks would be paid 7 percent of the amount raised; these days 5 percent is typical. Because the Facebook deal is so large, bankers will collect fees of lower percent, but still at handsome amount that could be at least $50 million. Facebook has guaranteed Wall Street a huge payday.
The next morning, the company CEO is expected to ring the opening bell on stock market to celebrate Facebook’s debut in stock market. The company chose "FB" as its ticker symbol but hasn't decided whether it will trade on the New York Stock Exchange or Nasdaq Stock Market.
After the IPO, Facebook has to prove to its new public shareholders that the company is good stock market investment. And stock market will be watching to see how Facebook IPO affects stocks of other social-networking companies.