Facebook Inc.'s high-profile and months-long transformation into a public company finally ends Friday with what will likely be the third-largest IPO in U.S. history – behind Visa in 2008 and General Motors in 2010. With an opening share price that will value the company in the $100-billion (U.S.) range, Facebook's IPO will instantly create a slew of paper millionaires, a few billionaires, and the most direct way for average investors to bet on the future of social networking.
But in reality, retail investors will be among the last groups invited to the Facebook IPO party. Even though the eight-year-old company plans to float about 421 million shares, many of those shares are changing hands from insiders of one sort to insiders of another. In fact, five key groups will have an interest in Facebook's success as a public company – and at least a few of those groups will reap the windfalls from that success.
The Early Investors
This week, Facebook announced it is raising the number of shares in its IPO by about 25 per cent, or 84 million shares. At the high end of the company's share price range, those extra shares will increase the size of the Facebook offering by another $3-billion or so.
Those extra shares aren't coming from the company, but from insiders who invested early in Facebook and have decided to sell more shares. Accel Partners, a venture firm that invested less than $13-million in Facebook seven years ago, now stands to make billions from its shares. Likewise with Mail.ru, the Russian Web firm owned by Alisher Usmanov, which invested in Facebook in 2009 and has also decided to sell more shares.
Normally, early investors can have significant say over how the companies they invest in are run. That's not the case with Facebook, where many of the investors agreed to play only a financial role in Facebook's development. Still, those venture capital firms that got in on the ground floor just a few years ago now stand to make billions of dollars by the end of the week.
Many of the people who were involved in Facebook's birth eight years ago will become billionaires by the end of the week – if they aren't already. Eduardo Saverin, one of the co-founders of the site, was recently the subject of criticism for renouncing his U.S. citizenship and moving to Singapore – a move some saw as an attempt to avoid paying U.S. taxes on his multibillion-dollar stake in the social network (although it appears he will still have to pay hundreds of millions of dollars in taxes, even after renouncing his citizenship).
But nobody will benefit more from, or be more vital to, Facebook's success as a public company than Mark Zuckerberg, Facebook's 28-year-old founder, CEO and controlling shareholder. If the company he built in his Harvard dorm room is valued at around $100-billion, Mr. Zuckerberg will be worth about $18-billion. In addition, he remains the CEO, chairman and controlling shareholder. Even after the company goes public, Mr. Zuckerberg will retain enough control to overrule all other Facebook investors combined.
Facebook's march to the Nasdaq was aided in large part by a phalanx of 33 underwriters, including such heavyweights as Morgan Stanley, JPMorgan Chase and Goldman Sachs. More than just help determine the opening share price and deal with the logistics of going public, the investment banks have served to introduce Facebook and Wall Street to one another.
Mr. Zuckerberg has so far shown little interest in the way the investment community traditionally does things. This week, he was chastised by some critics for showing up to meetings with prospective investors wearing a sweatshirt. Indeed, a clue to Mr. Zuckerberg's opinions on the IPO process can be found in the first line of his letter to investors, included in Facebook's regulatory filings: “Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected.”
Over the past week, the underwriters have tried to bridge this gap between the social network and the street. In the process, they've likely given Mr. Zuckerberg a taste of what it'll be like running one of the most closely watched public companies on Earth.
The Favoured Clients
When Facebook announced it will be floating 25 per cent more shares this week, it also revealed it will boost its “greenshoe,” or the number of shares its underwriters can sell if the IPO is oversubscribed. Underwriters can now sell 63.2-million shares, up from 50.6-million.
Given that the company didn't bother to complete its investor roadshow this week, cutting it off two days early, it's a pretty good bet that interest in the Facebook IPO is high. But retail investors are going to have a very hard time getting in early on the deal, in large part because the firms handling such high-profile IPOs tend to hand out their share allotments to favoured clients. In most cases, that means the clients with the biggest accounts. As such, if Facebook shares experience a big jump in price in the first days of trading, it's those favoured clients who stand to make a killing, much more so than the retail investors.
None of this is unique to the Facebook IPO. Indeed, there are plenty of instances where the banks' most important clients were given early access to a hot IPO. But nonetheless, by the time Facebook shares hit the open market, a lot of favoured investors will have made a lot of money.
One of the few pieces of bad news Facebook received this week came when General Motors announced it was pulling its ads from the social network. The news, first reported by the Wall Street Journal, doesn't represent a huge financial blow to the social network – GM spent about $10-million a year on Facebook advertising. However much of Facebook's valuation is based on its ability to connect advertisers to potential customers on a much more effective level, given its massive store of personal information about its users. If advertisers start to believe the social network isn't that much of an improvement over any other Web advertising format, Facebook's appeal to investors could take a hit.
This week, Internet marketing software firm WordStream published data estimating that Facebook's ad click-through rate – or the number of times users click on an ad divided by the number of times an ad is shown – is about 0.051 per cent. By comparison, the firm said, the average click-through rate for a banner ad in the U.S. is about 0.1 per cent. On Google's ad network, that number jumps to 0.4 per cent – that’s almost 10 times the click-through rate.
The data comes as analysts with the investment research firm Forrester posted a blog this week blasting Facebook for focusing too heavily on its users and not enough on marketers – something the company could afford to do when it was private, but will have a harder time justifying to its shareholders once it goes public.Report Typo/Error