Bloomberg News

Goldman Loses Facebook IPO Lead Role After ‘Strained’ 2011 Sale

February 08, 2012

Feb. 2 (Bloomberg) -- Goldman Sachs Group Inc., whose equity capital markets revenue dropped to No. 4 among U.S. rivals in 2011, failed to win the lead role in Facebook Inc.’s initial public offering after scuttling a private sale of the Internet company’s stock to U.S. investors a year ago.

Facebook, the world’s largest social-networking service, said yesterday that it hired Morgan Stanley as the $5 billion IPO’s top underwriter, typically the most lucrative job for banks in a stock offering. New York-based Goldman Sachs was listed third in a regulatory filing that named the banks involved.

The announcement marks a turnaround for Goldman Sachs’s ties with Facebook. Last year, the bank said it halted a private offering of Facebook stock to U.S. clients, citing concern that media reports may breach federal laws limiting marketing for private share sales.

“It would seem that the Goldman Sachs-Facebook relationship was strained as a result of that deal,” said Jack Ablin, who helps oversee $55 billion as chief investment officer for Chicago-based Harris Private Bank.

Facebook said in January 2011 it raised $1.5 billion from Goldman Sachs and Digital Sky Technologies, valuing the company at $50 billion. Goldman Sachs, affiliated funds and Digital Sky invested $500 million, while non-U.S. investors in a Goldman Sachs fund bought $1 billion of shares.

JPMorgan, BofA

Goldman Sachs fell in the ranking of equity underwriting revenue last year, dropping more than most rivals. The company, which ranked No. 1 among U.S. firms by revenue in that business as recently as 2006, trailed JPMorgan Chase & Co. in 2010 and last year slid to No. 4 with $1.09 billion, less than Charlotte, North Carolina-based Bank of America Corp. and Morgan Stanley.

Goldman Sachs still was the top underwriter of equity and equity-linked products by deal volume last year, according to data compiled by Bloomberg. The firm also was the No. 1 adviser to technology companies on mergers and acquisitions.

Michael DuVally, a spokesman for the firm, declined to comment.

Getting picked for the IPO is a coup for New York-based Morgan Stanley and Michael Grimes, its global co-head of technology investment banking with Paul Chamberlain. The firm won the biggest share of underwriting U.S. initial offers by Internet companies last year, Bloomberg data show. Taking the lead on Facebook may push the bank to first place in the U.S. IPO league table for a third consecutive year.

Zynga, Groupon

Grimes, a banker with Morgan Stanley since 1995, may have benefited from ties to Facebook Chief Operating Officer Sheryl Sandberg, who was a senior executive at Google Inc. at the time of its IPO. Morgan Stanley led that deal. In 2011, the firm also led Internet offerings from Zynga Inc., Groupon Inc. and LinkedIn Corp.

Goldman Sachs, which placed fourth in U.S. Internet IPOs last year behind Frankfurt-based Deutsche Bank AG and Bank of America, helped take Zynga and Groupon public, while losing out on LinkedIn, Bloomberg data show.

Since Morgan Stanley is listed first among underwriters as the so-called left lead in Facebook’s IPO, the bank probably will receive the biggest fees and the prestige that comes with arranging what could be the biggest technology or Internet IPO on record if the size of the offering grows, according to Bloomberg data. The $5 billion figure is a placeholder used to calculate fees and may change, according to Facebook.

$10 Billion

The Internet company had been discussing raising as much as $10 billion, a person with knowledge of the matter said late last year. That would trump the combined U.S. and German debut from Infineon Technologies AG totaling about $5.85 billion in 2000, Bloomberg data show.

The average fee on the IPOs of Yandex NV, Zynga, Renren Inc. and Groupon, Internet companies that each raised more than $500 million in U.S. initial offerings last year, was 5.1 percent, Bloomberg data show. Bankers handling Facebook’s IPO may collect fees as little as 1 percent to 1.5 percent, said two people with knowledge of the matter.

Goldman Sachs’s gains on its investment in Facebook likely will exceed additional fees it would have received from being lead underwriter. The firm invested $375 million of its own money in the Internet company as part of the fundraising Facebook announced last year, according to an offering document sent to clients. The firm said in the document that it may cut that to $300 million by selling a portion of its stake.

That investment was made at a price that valued Facebook at about $50 billion. The company is discussing a valuation of $75 billion to $100 billion in the IPO, two people familiar with the matter said last week. At the top of that range, Goldman Sachs could roughly double its money.

‘Intense Media Attention’

Goldman Sachs halted last year’s offering for U.S. investors after the deal drew “intense media attention,” it said at the time. Some reports during the transaction focused on documents that Goldman Sachs provided to potential investors, demonstrating that the firm’s interests didn’t necessarily match those of its clients.

A four-page description initially given to private wealth- management clients showed that, while investors would be subject to “significant restrictions” limiting their ability to sell stakes, the firm’s own holding could be sold or hedged without warning.

Goldman Sachs ultimately conducted an oversubscribed offering to its non-U.S. clients in the fund that invested $1 billion.

The scuttled attempt to sell Facebook shares in the U.S. later helped prompt lawmakers to examine whether rules were prohibiting closely held companies from tapping capital. For decades, regulators have limited the number of investors in such companies, which sometimes don’t disclose figures such as revenue, profit, cash flow and debt.

--Editors: Peter Eichenbaum, Dan Kraut

To contact the reporters on this story: Lee Spears in New York at lspears3@bloomberg.net; Michael J. Moore in New York at mmoore55@bloomberg.net.

To contact the editors responsible for this story: Jennifer Sondag at jsondag@bloomberg.net; David Scheer at dscheer@bloomberg.net.


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