Facebook's Underwriter Friends Are Cheap Insurance

Agenda-Setting Financial Insight.
March 12 2012 5:09 PM

Facebook's Underwriter Friends Are Cheap Insurance

Friends with benefits: Facebook added 25 new underwriters last week for its upcoming IPO.

Photo by aaron tam/AFP/Getty Images

Facebook has friended a raft of new underwriters for its forthcoming initial public offering. According to the company’s latest filing, there are now 31 of them, up from an initial six. That may be overkill, but the social network’s clout means it can line up the extra resources and reputational buffing at little, if any, cost. 

Mark Zuckerberg’s firm is hoping to sell a lot of high-priced stock - $5 billion or more, with the company valued at up to $100 billion. That’s one reason to bring on board a lot of salespeople with access to different investors. Since 2005, there have been 14 U.S. IPOs with more than 20 underwriters, according to Thomson Reuters data. Microsoft had more than 100 of them for its float back in 1986, raising only about $60 million. 

That said, investment banking has become more concentrated over recent decades, according to research by professors Xiaoding Liu and Jay Ritter of the University of Florida, with fewer banks involved per deal. And technology has made it easier to handle bigger offerings. So Facebook may not really need all its banks. Moreover, there’s no clear relationship with stock performance. Offerings with only 10 underwriters showed similar returns over one day, one month and six months to those with more than 20, according to the Reuters analysis. 

Yet there are other reasons to have more of them. The banks involved in an IPO are, essentially, putting their seal of approval on a company and its valuation. Many will produce research afterwards - presumably with a favorable predisposition. And underwriters can’t publish research in the run-up to an offering, which reduces the chance of negative buzz. 

For Facebook, there’s another argument, too. The California State Teachers’ Retirement System last month criticized the company for its all-male, all-white board. Rightly or wrongly, adding smaller banks founded and run by women and representatives of minority groups, such as Muriel Siebert & Co and Samuel A. Ramirez & Co, may help defuse that controversy. 

And with Facebook’s scale, it’s unlikely to cost much, if anything, extra. The company will only pay a fraction of the 7 percent fee underwriters hope for, anyway, because everyone wants in on such a big deal. Some of the new batch of banks may be friends of convenience rather than necessity. But if nothing else, they count as cheap insurance.

Read more at Reuters Breakingviews.

Robert Cyran moved from the London office to New York, where he covers global technology, pharmaceuticals and special situations. Rob began his career at Forbes magazine, where he assisted in the start-up of the international version of the magazine.



More Than Scottish Pride

Scotland’s referendum isn’t about nationalism. It’s about a system that failed, and a new generation looking to take a chance on itself. 

What Charles Barkley Gets Wrong About Corporal Punishment and Black Culture

Why Greenland’s “Dark Snow” Should Worry You

Three Talented Actresses in Three Terrible New Shows

Why Do Some People See the Virgin Mary in Grilled Cheese?

The science that explains the human need to find meaning in coincidences.


Happy Constitution Day!

Too bad it’s almost certainly unconstitutional.

Is It Worth Paying Full Price for the iPhone 6 to Keep Your Unlimited Data Plan? We Crunch the Numbers.

What to Do if You Literally Get a Bug in Your Ear

  News & Politics
Sept. 16 2014 7:03 PM Kansas Secretary of State Loses Battle to Protect Senator From Tough Race
Sept. 16 2014 4:16 PM The iPhone 6 Marks a Fresh Chance for Wireless Carriers to Kill Your Unlimited Data
The Eye
Sept. 16 2014 12:20 PM These Outdoor Cat Shelters Have More Style Than the Average Home
  Double X
The XX Factor
Sept. 15 2014 3:31 PM My Year As an Abortion Doula
  Slate Plus
Slate Plus Video
Sept. 16 2014 2:06 PM A Farewell From Emily Bazelon The former senior editor talks about her very first Slate pitch and says goodbye to the magazine.
Brow Beat
Sept. 16 2014 8:43 PM This 17-Minute Tribute to David Fincher Is the Perfect Preparation for Gone Girl
Future Tense
Sept. 16 2014 6:40 PM This iPhone 6 Feature Will Change Weather Forecasting
  Health & Science
Medical Examiner
Sept. 16 2014 11:46 PM The Scariest Campfire Story More horrifying than bears, snakes, or hook-handed killers.
Sports Nut
Sept. 15 2014 9:05 PM Giving Up on Goodell How the NFL lost the trust of its most loyal reporters.