Will Facebook deliver an IPO surprise?

In this photo from May 2010, Face­book CEO Mark Zucker­berg talks about the social net­work site’s new pri­vacy set­tings in Palo Alto, Calif. (Asso­ci­ated Press file | Mar­cio Jose Sanchez)

PALLAVI GOGOI

AP Busi­ness Writer

NEW YORK — Face­book founder Mark Zucker­berg turns up at busi­ness con­ven­tions in a hoodie. “Cocky” is the word used to describe him most often, after “bil­lion­aire.” He was Time’s per­son of the year at 26.

So when he takes Face­book pub­lic, why would he fol­low the Wall Street rules?

The com­pany is expected to file as early as Wednes­day to sell stock on the open mar­ket in what will be the most talked-about ini­tial pub­lic offer­ing since Google in 2004, maybe since the go-go 1990s.

Around the nation, reg­u­lar investors and IPO watch­ers are antic­i­pat­ing some kind of twist — per­haps a pro­vi­sion for the 800 mil­lion users of Face­book, a com­pany that pro­motes itself as all about per­sonal con­nec­tions, to get in on the action.

“Pan­de­mo­nium is what I expect in terms of demand for this stock,” says Scott Sweet, senior man­ag­ing part­ner at IPO Bou­tique, an advi­sory firm. “I don’t think Wall Street would want to anger Face­book users.”

The most suc­cess­ful young tech­nol­ogy com­pa­nies have a his­tory of doing things dif­fer­ently. Google’s IPO prospec­tus con­tained a let­ter from its founders to investors that said the com­pany believed in the motto “Don’t be evil.”

Face­book declined to com­ment, but Reena Aggar­wal, a finance pro­fes­sor who has stud­ied IPOs at George­town University’s McDo­nough School of Busi­ness, believes Zucker­berg will emu­late Google’s phi­los­o­phy, at least in principle.

Founders Larry Page and Sergey Brin wanted an IPO acces­si­ble to all investors, and said so in their first reg­u­la­tory fil­ing. Face­book may say some­thing sim­i­lar when it files to declare its inten­tion to sell stock publicly.

Face­book is expected to raise as much as $10 bil­lion, which will value the com­pany at $75 bil­lion to $100 bil­lion, mak­ing it one of the largest IPOs. A stock usu­ally starts trad­ing three to four months after the filing.

The highly antic­i­pated fil­ing will reveal how much Face­book intends to raise from the stock mar­ket, what it plans to do with the money and details on its own finan­cial per­for­mance and future growth prospects.

Along with Wall Street invest­ment banks, Google used a Dutch auc­tion, named for a means of sell­ing flow­ers in Hol­land, to sell its shares. It took pri­vate bids and allowed investors to say how many shares they wanted and what they were will­ing to pay.

The process wasn’t smooth, though, and Google had to slash its expected offer price at the last minute. If you bought at the IPO, for roughly $85 a share, you still did well: Google closed Tues­day at $580.

More recently, when it filed for an IPO last June, Groupon, which emails daily deals on prod­ucts and ser­vices to its mem­bers, added a let­ter from its 30-year-old founder, Andrew Mason.

“We are unusual and we like it that way,” the let­ter said. “We want the time peo­ple spend with Groupon to be mem­o­rable. Life is too short to be a bor­ing company.”

It’s almost become con­ven­tional for tech com­pa­nies to include an uncon­ven­tional let­ter when they make their stock mar­ket debut. It’s widely expected that Zucker­berg, in the very least mea­sure of show­man­ship, will write one.

But IPO watch­ers won­der whether there might be a pro­vi­sion specif­i­cally designed to give the little-guy investor, even the casual Face­book user who doesn’t invest, a piece of the debut.

“There is a feel­ing that there will be some­thing unique in store for Face­book users,” Aggar­wal says.

When most com­pa­nies go pub­lic, they let Wall Street invest­ment banks han­dle every­thing, with the sweet ground-floor stock price reserved for big insti­tu­tional investors.

But that prob­a­bly won’t do for Face­book, cre­ated in a Har­vard Uni­ver­sity dorm room eight years ago. Or Zucker­berg, whose anti­estab­lish­ment cre­den­tials include spurn­ing a $15 bil­lion takeover offer from Microsoft.

Few expect Zucker­berg to offer a Dutch auc­tion because of the Google expe­ri­ence. But he is at least as unortho­dox as Google’s founders. Peo­ple expect him to be in the driver’s seat on Wall Street, rather than hand over the con­trols to bankers.

Face­book is a vital part of people’s Inter­net lives and the most suc­cess­ful com­pany in the his­tory of social media. Its clos­est com­peti­tor, Google+, has less than a tenth the active mem­ber­ship — 60 mil­lion people.

“While there is no such thing as untouch­able, Face­book is get­ting near there, with even Google imi­tat­ing it,” says Sweet, of IPO Boutique.

In “really hot IPOs,” 90 per­cent of the shares go to insti­tu­tional investors and 10 per­cent to every­day investors, Sweet says. It’s a perk for the banks’ biggest clients, like Fidelity Invest­ments or T. Rowe Price or hedge funds.

The funds pay big com­mis­sions to the banks for reg­u­larly trad­ing large blocks of stocks or bonds. Those rela­tion­ships are deep and long-lasting — and lucra­tive for the banks. The funds expect to be rewarded.

But Mor­gan Stan­ley and Gold­man Sachs, the banks expected to guide the Face­book IPO, are in an awk­ward place: They don’t want to tick off 800 mil­lion Face­book users — but they don’t want to tick off Fidelity, either.

Most IPOs are under­priced, and the stock usu­ally shoots up the first day. Lucky large investors get the base­ment price and usu­ally a big pay­day if they sell on the first day. Smaller investors buy on the open mar­ket, after the price has spiked, and pay more.

And most early investors do sell. One uni­ver­sity research paper found that about 70 per­cent of the new stock changes hands in the first two days. Groupon intro­duced 35 mil­lion shares, but on the first day its shares were traded almost 50 mil­lion times.

Ann Sher­man, asso­ciate pro­fes­sor and IPO expert at DePaul Uni­ver­sity, raised the pos­si­bil­ity that Face­book could set aside a por­tion of its shares for the small investor and use a lot­tery sys­tem if there is a lot of demand.

She says the U.S. is the only coun­try with­out IPO rules that put tra­di­tional investors on an equal footing.

“Given that this is such a huge and pop­u­lar IPO, I’ve been hop­ing that Face­book would use this oppor­tu­nity to try a new method to bring in retail investors — a pub­lic offer where shares are set aside for only indi­vid­ual investors,” Sher­man says.

But Zucker­berg will also prob­a­bly be care­ful how he plays his cards. He doesn’t want to anger Face­book users, but his pri­mary goal is to raise money.

The recent expe­ri­ence of Groupon’s fal­ter­ing IPO holds tough lessons for young entre­pre­neurs. After ana­lysts started ques­tion­ing its account­ing, Groupon had to amend its reg­u­la­tory fil­ing sev­eral times.

Try­ing to sal­vage the IPO, founder Mason shed his trade­mark jeans and T-shirt and donned a suit. He dropped the irrev­er­ent talk and spoke about the company’s growth prospects at the IPO “road­show” to impress investors.

Other com­pa­nies have encoun­tered prob­lems when they went pub­lic and tried to reward cus­tomers. Upstart Inter­net phone com­pany Von­age wanted to give cus­tomers a chance to buy up to 15 per­cent of its 31 mil­lion shares at its IPO at $17 apiece.

But when the shares fell 13 per­cent on the first day of trad­ing, many of its small investors that had put in orders to buy didn’t want to pay the offer price. It gained the dubi­ous title of one of the worst IPOs that year, some­thing Face­book wants to avoid.

It’s also more expen­sive to sell shares to many peo­ple. When thou­sands of small investors want to buy in, it becomes a logis­ti­cal night­mare to make sure each investor gets a prospec­tus with all the impor­tant information.

Banks like large investors because it costs about the same to process an order of 50 shares as 50,000. But William Ham­brecht, founder and CEO of WR Ham­brecht & Co., a firm that runs IPO auc­tions, says com­pa­nies that value their cus­tomers ben­e­fit in the long run.

He gives the exam­ple of Boston Beer, maker of Samuel Adams, which went pub­lic in 1995. Its founder, James Koch, wanted to reward the peo­ple who made his com­pany suc­cess­ful: the buy­ers of Sam Adams.

Koch set aside a quar­ter of his shares for the small investor. The deal was a big suc­cess and attracted more inter­est from his beer drinkers than there were shares avail­able. Some peo­ple left out were dissatisfied.

Ham­brecht says about two-thirds of the investors who bought those shares still owned the stock two years after the IPO. Even today, about a third still own it. Ham­brecht says that’s because these investors appre­ci­ate the company’s product.

“Our argu­ment has always been that true buy­ers of your stock ought to be your own cus­tomer base,” says Ham­brecht. “As the great investor Peter Lynch said: Invest in what you know.”

Posted by AP News on Jan 31 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.