How To Purchase Facebook IPO Shares If You Decide To

Everyone’s talking about Facebook’s upcoming IPO. Regardless of if you want to invest, this post should help you understand the IPO process, find out if you’re qualified to purchase Facebook shares, and provide some opinion on the valuation.

To become more familiar with the offering, immediately check out the most recent SEC S-1 filing and the road show video. Focus on the filing, if nothing else check out the: prospectus summary (p. 1), selected consolidated financial data (p. 38), business (p. 84), and description of capital stock (p. 148).

As expected, the video is heavily scripted, biased, and focuses on the potential with their number of users. However, you don’t have to watch all 30 minutes; here’s a link to summarization. Also, if you want to balance out the melodramatic Zuckerburg, glimpse at the Facebook tag on Tumblr.

Facebook’s IPO Process
There are many reason why a company may want to go public, most notably, to raise capital and provide a liquidity mechanism for investors. There are no earnings, cash flow, profitability requirements for a company to IPO (outside of exchange requirements). This means a good IPO candidate can be a new, untested company.

Here’s the Facebook IPO timeline:

  • February 2012: The company files a S-1 with the SEC. The SEC and investors approved of the IPO.
  • April 2012: Facebook chose to be listed on the NASDAQ - getting a pretty sweet deal and will be given the FB ticker.
  • Current Stage: Investment bankers solicit interest from institutional clients during what is called a road show. Right now the price range is $28 to $35 per share. The approximately 337 million shares will bring in $9.4 billion cash at the low end of the range.
  • As early as May 18, 2012: Shares will be priced.
  • Sometime after May 18, 2012: FB will IPO, receiving cash for their shares. Plus, a few of FB’s executives, employees, and relatives will celebrate the NASDAQ opening bell. After which, the shares are open to the public.

The type of IPO auction is important to note. FB will be using the traditional allocation method, while 5 years ago, Google used a dutch auction. This partly decides which retail investors (you and I) will have access to the shares and how shares are allocated.

Participating in Facebook’s IPO
20% to 25% of the 337 million shares could be allocated to brokerage firms like TD Ameritrade, Charles Schwab, E*Trade, or others catering to small investors. Here is the general process to participate:

  1. First thing you should do is call your brokerage house. The brokerage should have an IPO department. This department will first see if your account is qualified, confirm you’ve read the prospectus, and understand the risks. For Charles Schwab, qualifying means having over $100,000 in household assets or having traded more than 35 times in the last year. Sometimes you’ll be asked to fill out an additional IPO form; I know E*Trade does this.
  2. Place a conditional offer to purchase IPO shares. Tell your broker the number of shares you want to purchase and the maximum price per share you are willing to pay.
  3. Once the price is set by FB’s underwriters, everyone has to reconfirm their conditional offer. The window for the reconfirmation is small (sometimes 1 trading day or 8am to 4pm EST) so make sure you check your IPO center and sign up for email updates. You will be able to change the price OR quantity of your conditional offer while the window is open. Remember, this also means changing the quantity to 0.
  4. Distribution of shares will depend on the allocation of shares your brokerage receives, demand for those shares, and finally how valuable you are as a client in terms of length and assets.  
  5. Standard commission rates will apply. You can’t, however, flip the IPO. If you’re planning on selling your shares the first day, think again. The brokerages will be upset and possibly penalize you (refer to your broker’s policy) by freezing your account. Normally, you will have to hold the security for 30 days after the IPO date.

Demand for shares will influence if shares will pop or drop on IPO day. FB is likely oversubscribed, meaning there is high demand and the syndicate of underwriters will not have to support the price. So now let’s talk about one of the factors driving demand, the valuation.

Opinion: FB Valuation
Now that you know if you’re eligible or not, let’s talk about FB’s $100B valuation. Firstly, not many IPOs have been successful (refer to the image).

There is a lot of information and opinions on the valuation. Below are a few points that have influenced my opinion in the recent weeks:

  • There are 2 main sources of revenue for FB: payment integration and advertising. The ability for payment integration has created an opportunity for companies like Zynga to thrive. When you have 3rd party developers building apps, it increases interaction of your platform like it has for Apple. At the same time companies are users to sign-on using FB making the business pervasive like Microsoft. On the other hand, because of the information supplied by users, advertisers can have more targeted campaigns than possible on Google. Both of these have great potential for growth.
  • Zynga and other developers are diversifying onto other platforms. Additionally, many services allow you to sign-on with Twitter instead of FB.
  • It is cheap to start a social network, but costly to run one. More employees, servers, and infrastructure will need to be added in the future, decreasing margins.
  • I don’t like the FB interface. Zuckerburg boasts about FB’s hacker mentality - creating a program with the minimum viable features and letting the user decide if it’s successful. Personally, I think FB needs a much better design. This culture is great when a company is just stating out and the innovative users are excited about the product (see next pt.); however, as the company grows, it should better its products.  
  • As the number of FB users increases, the coolness factor decreases. Many have thought that is the sole reason for $1B Instagram purchase. The market is only going to grow more competitive and so the number of acquisitions will have to increase. That compared with social media fatigue will impact revenues and time spent on FB. On the other hand, the more people on LinkedIn, Twitter, and Tumblr the better the service since people want to connect, follow, and increase their exposure. The more friends you have the less you can interact with each of them and FB is a personal network first.
  • I believe the valuation is too high. You can test your own valuation using this FT valuation tool. Refer to the table below for my logic:

          

  • FB had an awesome move made about the founder and the company: The Social Network. This matters because the glorification of the company has an impact on the oversubscription of IPO shares. People who have never bought an IPO before, will seriously think about participating in this one.
  • Users are important to FB and it’s priced at $1.11 per user and around $1.50 per active user based on a $100B valuation. That is much less than the $33 per Instagram user. Plus, the market potential outside the US is still great. Even in the US, young people create accounts and use them almost as soon as their born.

All in all, I may participate in the IPO if I’m confident the pop on the first day of trading will be large enough. For that to materialize, the shares would have to be priced at the very bottom of the range. At the same time, I believe the shares will drop significantly in the short term (60 days or less) presenting a buying opportunity well below the IPO price. Furthermore, in the next five years, the market capitalization has the potential to reach Google’s size.

I’ll be posting my thoughts and final decision on Twitter as the IPO date moves closer. Tweet me and let me know what you think. Also, read the investment disclaimer.

*Update 5/15*: Shares are 25 times oversubscribed according to a recent NYT Dealbook article. Subsequently, FB is raising their price range to $32 to $38.

Additionally, Bloomberg predicts online advertising to grow to $10 billion within the next year. Plus, FB is planning on adding diversity to their company by searching for female executives. The changes in management will be announced after the IPO.

Finally, today is the last day to decide if you would like to purchase IPO shares.

Q:Nice blog. You say you passed the series 7 and 63 during undergrad. Can I ask how you did that? I thought you needed sponsorship? I'm trying to do same thing, but don't have job in finance.

kkjc56

That’s right, you would need to be sponsored by a company (where you work) to take the series 7. On the other hand, you can take the series 63 on your own.

First, you should decide if you want to take the test.

  • Will it help your career? All careers that require a series 7 will sponsor, train, and maintain the license on their dime so it isn’t a requirement to land the job.
  • Will it help you during recruitment? Depends on how you spin it. Focus on the ingenuity and persistence it took to get sponsored.
  • Is it worth taking the time to study for it? Think about if everyone in the career you choose has the license. If they do, you may want to get a leg up by passing the test. Honestly, it is not impossible to pass with 100 to 200 hours of studying.

If you decide you still want to take the test, here are some ways to get sponsored:

  • Ask a family friend who own their own financial planning or insurance company to sponsor you. Pay them back the roughly $500 fee.
  • Intern unpaid at a place that will sponsor you. Since you won’t be needing the license as an intern, you’ll have to convince the management.
  • Land a full-time job in the industry and the company will take care of the rest or you can ask them to sponsor you.

Good luck and remember, the series 7 is usually not a requirement to land a job directly out of college.

This isn’t the kind of place where doing what everyone else is doing would be considered successful,” says Maris, who launched Google Ventures in the spring of 2009 to invest some of Google’s prodigious cash hoard in startups. “We’re trying to do something completely different, not because it’s different, but because we’re looking for a different outcome.

Google’s Creative Destruction (Fast Company Article)

Source: diligentventure

9 Examples of Investment Banking Work

                                        

By now you have a grasp of banking traits and a basic understanding of the technical skills needed for the job. Now let’s take it a step further and check out a few finished examples of projects you may get a chance to work on as an investment banking analyst.

The type of work is really dependent on which division your assigned to, size of your bank, and the progression, size, and type of deal your working on. On the other hand, you may get stuck fetching MDs coffee and dry cleaning or playing Brick Breaker (facetime) instead of working on these projects. Nevertheless, here are the 9 examples:

  1. Soliciting deals require binding several pitchbooks, many of which never result in a deal. Take a look at a set of Qatalyst books used to pitch Oracle to acquire Autonomy. Presentation #1 and Presentation #2
  2. Oracle never purchased Autonomy, but SAP did for a deal worth $6B. Okay so pitchbooks are more that just PowerPoint, right? Yes, here’s a taste of Excel models: comparable companies analysis, past precedent analysis, discounted cash flows, and leveraged buyouts.
  3. Research Reports, SEC Filings, Board Presentations are used to compile the information needed for the models and other documents. You will be spending plenty of time looking at numbers, financial and business drivers in these materials.
  4. Looking to solicit potential investors for an IPO? You’ll be working hard to create an offering memorandum.
  5. Hired for advisory work to evaluate a merger, acquisition, buyback, spinoff, or private company? You’ll be assigned to creating a fairness opinion.
  6. As a deal is going through, there is a lot of correspondence that takes place between your bank and the companies. Analysts will often be on the phone for hours taking notes or listening to presentations. Additionally, you’ll be exposed to the legal side of the deal process; and hope the deal works out.
  7. Merger, combo, or accretion/ dilution model will also be something you’ll get a chance to build for an M&A deal.
  8. There will be times that the modeling is not so common. Premiums analysis is one example of a model that won’t come up during an interview, but you may have build on the job.
  9. Finally, there are purchase and sale agreements. This contract is the foundation behind the negotiation and deal process. 

Would you like to see anything added? Leave a comment and I’ll see what I can do.

victongai: I did this portrait of Cees Dert for the latest aiCIO. Art direction from SooJin was “Amsterdam theme” and “having options”. Mr Dert once used different canals as an analogy for different investment choices, so I thought Amsterdam canals would be a good fit for this piece in many ways.  (Also I just really like to draw buildings…)  Really cool. I like the investments analogy and blend of colors.
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victongai:

I did this portrait of Cees Dert for the latest aiCIO. Art direction from SooJin was “Amsterdam theme” and “having options”. Mr Dert once used different canals as an analogy for different investment choices, so I thought Amsterdam canals would be a good fit for this piece in many ways.  (Also I just really like to draw buildings…) 

Really cool. I like the investments analogy and blend of colors.

Source: victongai

Overcome Your Interview Objections and Fears

                                  

Feeling overwhelmed, rejected, or just fatigued? Don’t worry, we have all been there. In the past, I talked about overcoming objections during a cold call, now I want to discuss a few phycological objections candidates may feel as they go through recruitment. 

Most fears are caused by false projections or misleading metal projections. I suggest identifying what the issue is and taking steps to move past it as soon as possible. Here are a few possible situations you may run into:

Objections #1: Even if I meet someone, how do I know that he’ll actually see my resume and select me for an interview?

You don’t know if they will be helpful or not. Talking to your contact will help you practice your communication skills and learn something about the field no matter how the situation turns out. The solution to this issue is meeting as many bankers as possible, this way at least one of them will deliver.

Objection #2: Won’t bankers I approach think I’m using them?

Yes, bankers will think you are calling them to win offer, and there is nothing wrong with that. If you don’t reach out, someone else will take your offer. Build a relationship with the banker and this will make the situation easier. Also be sure to thank them and express your gratitude as they help you out.

Objection #3: Isn’t there a chance the banker will reject me?

Of course there is. There is also a chance they will help you get a job. Don’t be afraid of rejection, learn from it, improve, and carry on.

Objection #4: If I contact everyone now, won’t end up using up all the contacts before I’m ready?

Contacting bankers will help provide you with more information about the job. At the end of the call ask for referrals. This means as you contact people on your list, your network will expand. Additionally, the great thing about being situated in the US is there are plenty of investment banks and private equity shops. So many that it is almost impossible to run out bankers to call without landing an offer.

Objection #5: Does networking and preparation work for everyone?

International, non-target, non-finace, and students with little or no experience can break into iBanking. That said, some people have to work much harder than others. Having realistic expectations depending on your situation is critical. As you talk to bankers, you’ll be able to judge your chances and motivation to break into the industry.

Objection #6: Are bankers are scary?

Bankers are human. Get over your fear by meeting them through career fairs and information sessions. If you still think they are too intimidating, rethink your career choice; there are plenty of other business jobs. 

Objection #7: I’ve heard breaking in is easy (i.e., will take a couple of weeks) so I don’t need to start now.

Unless you’re a Harvard undergrad with a 4.0 GPA and exceptional communication skills and connections, it is difficult to break into banking. If you want to be come a banker, start working towards it right now. Procrastination will most likely limit your future job prospects. 

Objection #8: The competition is too difficult this year. Should I take more time to prepare?

Not feeling 100% confident in your preparation is a good thing. Your marginal improvement will approach zero after about a dozen mock interviews. Signup for evens and interviews even if you’re not prepared, this will act as a deadline and help motivate your development. You are definitely overestimating the competition. The vast majority of candidates haven’t spend hours preparing for interviews and networking.

Objection #9: Economic conditions are terrible. Should I wait another year?

There is always a demand for investment banking analysts. Since they are the cheapest and hardest working bankers in the office, they are usually the last to be laid off. That said, analyst class sizes may shrink. Don’t let that deter you from your goals. Networking is more important during slow economic times. If that doesn’t work, consider interning for free; hopefully next year demand for analysts will rise again.

Objection #10: I just got rejected. Do I have anymore options, should I continue?

As Chris Gardner famously said, “Don’t ever let someone tell you, you can’t do something. Not even me. You got a dream, you got to protect it. People can’t do something themselves, they want to tell you you can’t do it. You want something, go get it.” Failing often and frequently is the best way to learn and eventually win an offer. Don’t fear rejection, embrace it.

In the end, everything will work out. Don’t allow yourself to be dramatic over the long run. Start working hard again as soon as possible. That said, check out the next section for a little short term motivation.

Inspirational Videos and Quotes

“If you do not know how to ask the right question, you discover nothing.” William Edwards Deming

“If you don’t go after what you want, you’ll never have it. If you don’t ask, the answer is always no. If you don’t step forward, you’re always in the same place.” Nora Roberts

“Only those who will risk going too far can possibly find out how far one can go.” Thomas Stearns Eliot

“People often say that motivation doesn’t last. Well, neither does bathing - that’s why we recommend it daily.” Zig Ziglar

“Twenty years from now you will be more disappointed by the things that you didn’t do than by the ones you did do. So throw off the bowlines. Sail away from the safe harbor. Catch the trade winds in your sails. Explore. Dream. Discover.” Mark Twain

“It’s fine to celebrate success but it is more important to heed the lessons of failure.” Bill Gates

“100% of the shots you don’t take, don’t go in.” Wayne Gretzky

“You can’t overestimate the need to plan and prepare. In most of the mistakes I’ve made, there has been this common theme of inadequate planning beforehand. You really can’t over-prepare in business!” Chris Corrigan

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.” Charles Darwin

“Business opportunities are like buses, there’s always another one coming.” Richard Branson

“Whatever the mind of man can conceive and believe, it can achieve. Thoughts are things! And powerful things at that, when mixed with definiteness of purpose, and burning desire, can be translated into riches.” Napoleon Hill

“For all of its faults, it gives most hardworking people a chance to improve themselves economically, even as the deck is stacked in favor of the privileged few. Here are the choices most of us face in such a system: Get bitter or get busy.“ Bill O’ Reilly

Starting Your Investment Banking Job

Congratulations on accepting the offer. When you get a chance to sober up from all of the celebrating, take some time to prepare for your job.

Preparation

  • Find a place to live. Figure out the roommate situation and location.
  • Go shopping for cloths.
  • Create a budget. Yes, even though you are going to be making more than most of your peers, expenses will add up quickly.
  • Thank everyone who helped you get a job, and update them on your new employment status.

Once you start working

  • Workout and eat well. With $35 allocated for dinner, it’s easy to pack on the pounds with a sedentary lifestyle.
  • Get some Yerba Matte. It is natural tea with enough caffeine to keep you up all night.
  • Clear your calendar, or be prepared to cancel on family and friends.
  • A few weeks in, you’ll quickly pick up key terms, excel shortcuts, and finance/ accounting concepts. From then on most tasks get relatively mundane. As with any job, don’t let that detract from your performance. Remember the 9 tips of banking.
  • Make the most of training, it is literally the best time to be a banker. From then on it get a lot more difficult.

Performance

Land a full-time offer (summer interns)

  • Do work hard and learn as much as you can with a great attitude.
  • Don’t act like the smartest or best at anything because you are not.
  • Don’t forget your only there for 8 to 10 weeks.
  • Don’t be over excited for extra work.
  • Don’t argue. Don’t whine.
  • Over 80% of your analyst class will most likely receive full-time offers.

Get the highest bonus (full-time analysts)

  • Getting a top tier bonus requires people to like you. Go out, network, and pretend like you’re working, especially when you’re not.
  • After first year you have pretty much experienced everything. If you decide to duck out periodically, make sure you don’t get caught.
  • Don’t spend a lot of time on the first draft. There will be several more revision necessary.
  • Make friends with the staffer, your associate, and secretary. Hopefully, these guys will know what is important work and avoid the rest.
  • Don’t be the point person for a pitchbook or project. That person will get yelled at the most.

Networking

  • Training will be one of the easiest times to network. Keep in touch with analysts from different banks, locations, and department. Chances are high they will be helpful in the future.
  • In the future, when you make the shift to private equity, venture capital, or hedge funds, networking becomes vital again. Start as soon as possible.
  • Attend you bank’s networking and charity events.
  • Make corporate contacts with clients you encounter from work.

Lifestyle

The amount of free time you have will be highly dependent on you bank’s culture, deal flow, team, and location. Expect 90 to 100 hour weeks. This means there really isn’t time left over to go out. Regardless, you’ll make some really good friends in the office. If they invite you to go out, do it. Then share your stories with the rest of us stuck at work.