Facebook: the IPO process

going public

Going public is a highly choreographed dance.  FB is in the middle of its own time on “Dancing with the Stars,” vying for a prize of close to $100 billion.

the sequence of events

When a company decides to have its stock publicly traded:

hiring Wall Street

1.  it hires a team of investment bankers

filing with the SEC

2. with the investment bankers’ help, it prepares and files a comprehensive registration statement with the SEC for that agency’s regulatory approval.  Called an S-1, it becomes the preliminary prospectus which is given to potential investors once the SEC gives its ok.  Like any other company’s, FB’s approved S-1 can be found on the SEC’s Edgar website, along with any earlier versions the SEC may have sent back for more work.

The S-1 is legally required to be accurate and complete disclosure of all material information relating to company’s business.

Note:  SEC approval means only that the document is procedurally correct.  The agency doesn’t guarantee that the S-1/prospectus is in fact accurate or complete disclosure.   Nor does it say whether it thinks the stock will be a good investment or not.

the roadshow

3.  it launches a marketing campaign, whose centerpiece is a management roadshow organized by the investment bankers.

The roadshow typically lasts a week or two.  It reaches all the major investment centers and all the important money management firms in the country.

If demand to see and hear the company is high, as it clearly is in this case, management will be broken up into two or more teams (the FB video suggests it may have as many as four).  One will normally be headed by the CEO, another by the CFO.

The schedule is brutal.  Each day begins with a breakfast meeting.  Private meetings–usually an hour long + travel time to the next one–with important money management firms follow.  Then there’s a lunch, often with large numbers of portfolio managers, analysts and the press, none influential enough (read: big enough commission payers) to justify a private meeting.  Then there are private meetings in the afternoon, followed by a dinner presentation–and then possibly a trip to the next city on the list.

Add it all up and management is telling the same story, over and over again, maybe 7x-8x a day.

Since the S-1 must contain all material information about the company, it’s important that management not say anything that’s not contained in it–especially if someone might later on construe this as important.  So the teams are highly scripted and drilled on how to answer questions commonly asked.

In a way, the teams are a bit like actors.  They’re supposed to–if they can–smile and signal to questioners their respect for his penetrating insights and the thought/wisdom behind the query.  All they while they may be thinking, “Not again!” and “Doesn’t anyone read the prospectus?  The information he wants is on the first couple of pages!”

the video

Facebook has made a very artful 30-minute video (my comments tomorrow), available on its website, which I gather it intended to play at every meeting.  Smart move.  It burns up half the meeting time.  It also provides a clear roadmap for predictable follow-up questions–responses to which can be cleared by the legal department and rehearsed in advance.  The WSJ says, however, the video wasn’t played during the big public lunch in Boston after heated complaints about it at the comparable affair in Manhattan.

pricing the offering/allocating stock

4. the investment bankers are gathering feedback from clients throughout this time.  They’re trying to gauge the level of investor interest so they can set final pricing and decide to divide up the IPO stock among investors who place orders.

At the same time, money managers will want to get a sense of how “hot” the offering is.  Usually that’s expressed in terms of how many times the books are covered–that is, by how many times the requests for stock exceed the shares available for sale.  FB is a relatively large offering, so 3x or 4x would be impressive.  My guess is that the number is already high than that.  Of course, this can be a self-reinforcing process.  When money managers believe an offering is “hot,” they may request double or triple (or more) the stock they really want, in the hope they’ll end up with a bigger allocation after everyone’s order is cut back.

More tomorrow.


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