The Ultimate Guide to Facebook's IPO - BusinessWeek

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Markets & Finance February 09, 2012, 6:00 PM EST

By Karen Weise and Jesse Hamilton Facebook executives have fallen silent. Having filed paperwork on Feb. 1 with the Securities and Exchange Commission to raise $5 billion in an initial public offering, the social network site is now in a quiet period where federal rules limit what company executives can say in public. Behind the scenes, its a different story. The Menlo Park (Calif.)-based company is just beginning a months-long slog that involves appeasing regulators, wooing investors, and dealing with endless amounts of paperwork. While it will follow a familiar pattern, this is no routine deal, what with the epic media attention (and possible $100 billion market valuation) a Facebook offering will attract. When youre doing one of these offerings thats high-profile, you know that youre under a microscope, says Martin Wellington, a partner at Davis Polk & Wardwell who worked on the Pandora IPO. In addition to SEC scrutiny, you expect there will be a high degree of interest from the press, the blogosphere, and the investment community. Everyone working on the deal is going to be particularly careful. Heres a look at what probably lies ahead for Facebook, based on interviews with regulators and people involved in previous Silicon Valley IPOs. Spokesmen for Facebook and Morgan Stanley (MS), Facebooks lead banker, declined to comment. When Facebooks S-1 filing landed in the SECs computers, it 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 SECs first comment letter, which typically lays out 50 to 100 queries that the company must address. An agency spokesman declined to discuss the Facebook IPO. The SEC may challenge various aspects of the filing. It asked LinkedIn (LNKD) how it could back up its claim to be the worlds largest professional network on the Internet. It queried Zillow (Z) on how the real estate website ensures its not double-counting users who access it both online and on mobile apps. It told Zynga (ZNGA) that a graphic at the beginning of its filing, which showed

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The Ultimate Guide to Facebook's IPO - BusinessWeek

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the number of users, should not be used to present only the most favorable aspects of its business and asked why it hadnt mentioned more prominently that the vast majority of users play its games for free. Questions about how companies track and count their users have come up in several recent Internet IPOs. The issue could arise with Facebook, which boasts 845 million active monthly users, though that number includes people who dont visit Facebooks main site and instead interact with the social network through partner sites. The regulators also scrutinize corporate governance and accounting policies. Groupon (GRPN) diverged from standard accounting methods and didnt include the costs of online marketing when calculating its operating income. Eventually the SEC forced it to restate its financials. Dont mess with the SEC is the lesson Seth Priebatsch, chief executive officer of SCVNGR, a Groupon competitor, told Bloomberg Businessweek at the time. The agency told buyout firm Carlyle Group that it wouldnt approve its IPO unless the private equity firm abandoned provisions that banned shareholders from filing class actions. On Feb. 3, Carlyle capitulated. One issue that may come up in the Facebook review is the power that founder and CEO Mark Zuckerberg, 27, will have once the company is publica question thats already been raised by the second-largest U.S. pension fund, California State Teachers Retirement System. 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 letterusually within 30 days of the filingit will e-mail it to Zuckerberg with a copy going to Gordon Davidson, an attorney at Fenwick & West who is Facebooks lead outside counsel. Within minutes its in the hands of anyone who has involvement with the transaction, says Lise Buyer, a consultant who worked with Google (GOOG) on its IPO. At Facebook, Chief Financial Officer David Ebersman, 42, who joined the company from Genentech in 2009, is in charge of getting the deal done, according to a banker involved with the deal. Hes managing a team that includes Morgan Stanley bankers, accountants from Ernst & Young, and Facebooks and Morgan Stanleys lawyers. Many IPO teams set up shop at the offices of a financial printer such as Donnelly. 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. Imagine there might be 20, 25 people in the conference room, and you might spend the better part of a week there, says Brian Erb, a lawyer at Ropes & Gray who represented the banks involved in Zyngas IPO. He says people barely leave the conference room and often eat all their meals there: It tends to be a little dicey after a while.

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The Ultimate Guide to Facebook's IPO - BusinessWeek

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Companies may push back on some SEC requests, hoping to shield confidential information. Executives can pick up the phone to call the agencys examiners or take their concerns to a more senior official if need be, says Alan Mendelson, a partner at Latham & Watkins who has worked on IPOs in Silicon Valley. You can resolve most of the issues, typically, he says. Still, the SEC has the final word, so a company might have to cave and put something in the document that you prefer not to, he says. 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 shrinka 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, almost certainly including Zuckerberg, Ebersman, and Chief Operating Officer Sheryl Sandberg, 42, will play the role of traveling salesmen, hopscotching across the country to meet with major investors and entice them to buy the stock. Executives generally practice their presentations to refine the pitch. Bankersand sometimes outside consultantspepper management with challenging questions that might be asked by prospective investors. Even a hot company like Facebook has to have a persuasive story line. Facebook doesnt have to work as hard to convince people that theres a use for their product, says Buyer. I would assume the bulk of their presentation will 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 banks offices, where the companys CEO revs up the banks sales force. Thats 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 investorswhich can be a buffet for 20 at an airport hotel or something grander: Google invited 800 people to dine at the Waldorf Astoria in Manhattan. Jive Software (JIVE) CEO Tony Zingale and CFO Bryan Leblanc met with more than 100 investor groups in 10 cities during the two-week stretch leading up to their companys IPO on Dec. 12. We started at 6 in the morning and went until 6 at night, and then we went on an airplane somewhere, says Zingale. Its repetitive and grueling, but you better be on your toes and energetic in every one of those meetings. 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 wont be finding enough customers but allocating shares in a way that will keep their best, revenue-generating clients happy. There will be a lot of people jockeying to get allocations, says David Weild, senior adviser at accounting firm Grant Thornton, adding that bankers are already trying to manage expectations to limit investors disappointment. Immediately after the final roadshow session ends, bankers and company executives sit down to

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The Ultimate Guide to Facebook's IPO - BusinessWeek

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set a price for the stock, which starts trading the next day. Theres an art to the pricing. Along with raising money, says Zingale, companies want investors who wont flip the stock. And youd love to have the stock trade up on the first day or days and then stay at that level, he says. Those are the headlines that youre 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 companys 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 as little as 1 percent to 1.5 percent, or a total of about $50 million to $75 million, say two people with knowledge of the matter who declined to be named because the information is private. The next morning, if he follows the footsteps of Zyngas Mark Pincus and Groupons Andrew Mason, Zuckerberg will ring the opening bell on the New York Stock Exchange (NYX) or Nasdaq (NDAQ) (the company still hasnt decided where the stock will trade) to celebrate Facebooks debut. After weeks on the road, Zuckerberg and his team will likely head back to Silicon Valley and get back to running the businessnow on behalf of their new public owners. The bottom line: The path to Facebooks $5 billion offering involves months of negotiations with the SEC and presentations to investors. With Brian Womack, Ari Levy and Serena Saitto Weise is a reporter for Bloomberg Businessweek. Hamilton is a reporter for Bloomberg News.

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