- Facebook is flouting normal rules governing Wall Street initial public offerings
- Mark Zuckerberg may not turn up for the investor roadshow, usually a key event
- Investor: "I look at Wall Street as broken, from the point of view of Silicon Valley"
As Wall Street makes final preparations for the largest technology debut by value in history, it has also faced what some bankers and investors have come to see as a series of snubs from Facebook.
From the sidelining of the banks through the registration process to the dithering of Mark Zuckerberg, Facebook's co-founder and chief executive, over whether or not he will turn up for the investor roadshow, the message has been clear: whatever the normal rules governing Wall Street initial public offerings, Facebook is the one calling the shots. The notion that Mr Zuckerberg has even considered steering clear of such a key event in the build-up to an IPO that investors have long been waiting for, is just one illustration of the bargaining power he and his social networking company, with 900m users and counting, wields over some of the world's most dominant banking institutions.
"I look at Wall Street as broken, from the point of view of Silicon Valley," says Roger McNamee, an established tech investor and founder of Elevation Partners, the $1.9bn fund.
Facebook's handling of its offering is taking the slowly shifting power dynamic in favour of Silicon Valley to a new level in its historically tense relationship with Wall Street; a tension that stems from bankers' success in the 1990s "bullying" often young management into deals benefiting investors more than the companies, according to Silicon Valley veterans.
Google's co-founders Sergey Brin and Larry Page are credited by these industry insiders as being the first technology entrepreneurs to wrest significant control of the IPO process away from their bankers back in 2004, though they also earned a reputation among investors of being arrogant. Since then, according to one long-time technology investor, Silicon Valley IPO advisers have become more savvy, and bankers, in turn, have become less aggressive.
Reuben Daniels, partner at EA Markets, a boutique investment bank, adds that a more common view has developed among tech entrepreneurs that Wall Street is a service provider rather than offering essential insight or relationships. Facebook's rise from start-up to global company adds to its influence, he says. Jay Ritter, a professor of finance at the University of Florida, says: "In Silicon Valley, the venture capitalists and entrepreneurs know that what's best for the investment bankers is not necessarily what's best for the companies. With big tech companies such as Facebook and Google, the companies realise that they've got a lot of bargaining power."
As with any large IPO, Facebook's offering, which could give the company an equity value between $75bn and $100bn, has already given it the leverage to make more common demands such as lower percentages on banking fees compared with smaller debuts. Although Facebook is not going as far as Google, which used an auction system instead of having underwriters set the price for its own $2.4bn IPO, the largest tech IPO at the time, Facebook is still planning to keep close control over the pricing and allocation of its shares, according to people familiar with the process.
Google also pioneered shares with dual-class voting structures in the tech industry, which many of its tech successors now use, including Facebook, so its founders can maintain control, says Lise Buyer, an IPO adviser who worked at Google when it was listing. "Every so often you have a company that has the market power to dictate the terms," she says. "In the case of Google, and likely Facebook, the bankers generally strenuously argue their points, and mostly, ultimately, acquiesce."
Facebook plans to carefully screen orders ahead of the float, rejecting those it deems unsuitable shareholders, according to several people familiar with the preparations. The company will welcome institutional investors it is confident will hold its stock over the long term, rather than those looking to make a quick profit, which has frustrated some bankers who represent individuals.
A retail broker with a large client base fears that only a tiny portion of shares will be allocated to individual investors, as was the case for the IPOs of Groupon, Zynga and LinkedIn.
The social network has maintained tight control of the entire process, including -- in a rare move -- writing its own registration filing with very little input from the banks, according to people familiar with the situation. It has also hired 31 banks to help sell its stock and attract the specific investors it seeks, compared with the 10 more typical for this size of deal.
"It gives Facebook better bargaining power," University of Florida's Prof Ritter says. "Facebook can play the underwriters off each other to get the best initial price for the stock."
It appears that Facebook is still trying to figure out which way the power balance will tip if Mr Zuckerberg attends the roadshow or opts out. Investors had high expectations of meeting the Google founders on its roadshow, but Mr Brin and Mr Page ultimately offended them with their contemptuous attitude towards Wall Street's preference to talk finances over and above the company's technology.
Some industry insiders say that Mr Zuckerberg's dilemma over attendance is not about exerting power. He appears nervous in front of crowds and has said that he dislikes public speaking. Leaving the roadshow to Sheryl Sandberg, chief operating officer and former Google executive, and David Ebersman, chief financial officer, would be more a tactical move than a statement of disdain, according to a person with knowledge of the preparations. Facebook declined to comment, as did the lead underwriters, Morgan Stanley, JPMorgan and Goldman Sachs.
But a no-show could backfire, as several investors have vowed not to place orders for Facebook shares if Mr Zuckerberg, who controls 57 per cent of voting rights, does not attend, according to a person familiar with the situation. If those investors are large, it could have a negative effect on Facebook's valuation, the person said, though there should be plenty of investors willing to take up the shares.
Facebook would "probably pay a penalty for him not being there", the person said.
One banker involved says his biggest worry is whether the power that Facebook wrests from Wall Street will set a precedent for future tech IPOs.
While Silicon Valley has benefited from Google and now Facebook in shifting the power dynamic between the two sides, smaller companies are unlikely to be so successful, counters Roger McNamee, a tech investor and founder of Elevation Partners, the $1.9bn fund. The recent debuts of Zynga and Groupon had less influence, and therefore disappointing offerings, he says. "Facebook is one of a kind. It's the IPO of this generation."