Quirky, pioneering companies have long viewed the initial public offering process not only as a chance to raise money but also as an unparalleled PR opportunity—the ultimate expression of their values. In the 1980s ice cream makers Ben Cohen and Jerry Greenfield offered stock to their Vermont neighbors and to the local dairy farmers who were supplying them with milk. In 1995, Boston Beer (SAM), the maker of Samuel Adams, announced via ads on its bottles that any loyal drinker could buy into the company at $15 a share. Most famously, in 2004, Google (GOOG) tried to dilute the influence of the big investment banks and ran a so-called Dutch auction, letting prospective investors collectively set the price by submitting blind bids for shares. “It was a uniquely Googley experience,” wrote Chairman Eric Schmidt in the Harvard Business Review in 2010, “that to this day says a lot about who we are.”
Now we come to the most high-profile market debut since Google’s—the Facebook IPO. Mark Zuckerberg and his colleagues are ready to cap one of the greatest entrepreneurial stories of all time with a public offering that will value the company at $75 billion to $100 billion, according to Bloomberg News. That’s roughly four times Yahoo!’s (YHOO) market capitalization, double EBay’s (EBAY), and around the same valuation as Amazon.com (AMZN), with its dozens of fulfillment centers around the world. Belying its reputation as a company defined by its users, Facebook appears to be preparing for an entirely conventional IPO, with none of the egalitarian aspirations that characterized those offbeat offerings of the past. By bringing in some of the country’s biggest and most recognizable banks to manage the IPO, Facebook has not only guaranteed those institutions a huge payday; it has also aligned itself with Wall Street at a time when public hostility toward the financial establishment is higher than ever.
The IPO is often a defining moment in the life of a company, the point at which its buoyant values are tested by the rapacious forces of naked capitalism. The act of going public means Facebook is about to become, inevitably, a different beast. As a public firm it will be under pressure to maintain its torrid growth rate, and to continue to push users to share information with one another and with advertisers. Zuckerberg & Co. have never shown that they have any difficulty making these kinds of compromises—and in that sense, their comfortable alliance with the nation’s biggest investment banks shouldn’t be all that surprising. Like many other entrepreneurs, Zuckerberg claims to have a higher calling, but as his S1 filing shows, he’s also out to build one of the biggest companies on the planet.
Facebook was always as much a mission as it was a company. Zuckerberg started the site in his Harvard University dorm room in February 2004 and moved to Silicon Valley a few months later. He soon had almost messianic hopes for the social network, saying repeatedly that he wanted to “give people the power to share and make the world more open and connected.”
In the IPO filing on Feb. 1, Zuckerberg continued to remind the world that his company is not conventional in any sense, asserting that “Facebook was not originally created to be a company” and describing its internal culture as “the hacker way.” The prospectus continues: “There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future.” The regulatory filing was chock-full of revelatory details. Facebook saw sales of $3.7 billion in 2011, up from $1.9 billion in 2010, and the company made $1 billion in profit last year alone.
When it comes to raising money, Facebook has never had to concern itself with the optics. In 2007 the company raised $240 million from Microsoft (MSFT), not the cuddliest of high-tech companies. A year and a half later it took in $200 million from Digital Sky Technologies, a venture capital firm that counts among its investors Russian oligarch Alisher Usmanov, one of the world’s wealthiest men. Last year it let Goldman Sachs (GS) invest and funnel shares to private clients. In each case, Facebook’s ballooning valuation ($15 billion! $50 billion!), rather than the complicated entanglements with its backers, got headlines. Its practice of letting investors such as DST Managing Director Yuri Milner buy additional shares from employees and shareholders, in a so-called secondary transaction, even became standard practice at other hot Valley companies such as Twitter.
In filing for the IPO, Zuckerberg seems to have taken few steps to avoid the perception of an unseemly alliance with Wall Street. Shares in the IPO, which is likely to occur in May, will be divvied up among the best customers of Morgan Stanley (MS), JPMorgan Chase (JPM), Goldman Sachs, Bank of America (BAC), Barclays Capital (BCS), and Allen & Co., all of which have jockeyed fiercely for a place at the table and a commission on the proceeds. Facebook reportedly had to decide between Morgan Stanley and Goldman for the coveted position of lead underwriter, which is like having to choose between a leech and a tick for a medicinal bloodletting.
In a few months, bankers at those institutions will set the initial trading price and rig it to jump up nicely on the first day of trading—handing their clients a sweet, guaranteed return. Only then will Joe Investor (a designation that includes most of Facebook’s 845 million users) get a chance to buy a piece of the social network, which makes money by selling the ads to accompany users’ photos, status updates, and friend connections. “I’ve always interpreted their values to be about openness and transparency, and there is nothing less transparent than having five bankers set the price of your IPO,” says Zach Nelson, chief executive officer of enterprise software provider NetSuite (N), which ran a Dutch auction IPO in 2007.
To be fair, Facebook does have some good reasons for shunning alternative approaches such as the Dutch auction, or trying to allocate shares directly to users. Such financial maneuvers could expose the company to a hornet’s nest of complexity and Securities and Exchange Commission scrutiny, which can come back to haunt those with good intentions. In 2004, Google thought that by setting the price via auction it could avoid the sudden price bounce that enriched insiders. But its stock jumped anyway on the first day of trading from $85 to over $100. Bill Hambrecht, whose San Francisco investment bank, WR Hambrecht, ran the auction, believes Google’s traditional underwriters worked behind the scenes to drive down the starting auction price. Because of the subsequent spike, Google got slammed in the press for both hubris and naiveté.
Hambrecht says his firm “made an assumption early in the game that Facebook was so tied in to Wall Street and particularly Goldman Sachs and Morgan Stanley that it was preordained to be a traditional deal.” That surprises some observers who believe Zuckerberg had the leverage to do things differently, and in the process could have reaffirmed Facebook’s image of innovation and anti-establishment thinking. “Facebook could probably decide to sell shares in their parking lot if they wanted to,” says Peter Falvey, managing director of Morgan Keegan Technology Group, a Boston investment bank.
In his S1 letter, Zuckerberg said he would ignore calls for short-term gains and focus instead on “creating value for our shareholders and partners over the long term.” He has the authority to enforce that discipline, owning or controlling an extraordinary 57 percent of voting shares. But even tech companies that claim they will resist outside pressure soon find that the demands of Wall Street are as inexorable as gravity. Witness Google’s latest contortions to start a social network or even Ben & Jerry’s, which was snapped up by Dutch-British food giant Unilever (UL) in 2000. Whether it likes it or not, Facebook will now be accountable to a lot of people who do not share its values.
How Facebook navigates the IPO may reveal a lot about its immunity to these outside forces in the future. By friending Wall Street at the start of its journey to the public markets, Facebook is giving its users something unpleasant to think about: Their personal information is helping to make rich people even richer.