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.

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.

Behavioral Interviews: Formulating Your Story

                                    

Almost 80% of the questions you are asked during the behavioral portion of your interview are related to your story. Candidates never win offers based solely on their technical skills. In my previous post, I explain how to structure your story. This post addresses the two main points you should remember when formulating your answer.

Be Interesting
Interviewers look for candidates who can pass the “airport test”. Are you the type of person I wouldn’t mind being stuck in an airport with? The key to having a causal conversation is being a “well-rounded” person. Have interests outside of finance. I’m sure you’re all every interesting people, but remember this is still an interview.

  • Pick a few interests that demonstrate your potential leadership, creativity, stamina, or intelligence. Here are a few examples:
  • Games are awesome. Pick a sport you’ve played. I’m guessing that you know about the sport so you can converse about the stamina, leadership, as well as competitive spirit needed to partake.
  • Pick a hobby that requires intellect or strategic thinking. Personally, I’m an FAA certified pilot.
  • Do you have a study/ work abroad experience? This is a great conversation topic. Be sure to focus on the studying part and less on the partying.
  • Mentioning you know a language is pretty cool as well. Just be sure you can speak the language in the fluency you portray. Be honest for all of your interests, because you will have to talk about them.

Remember playing those icebreaker games in high school? Thinking about what you’re known for and talking about that will set you apart from the rest of the candidates.

List these at the bottom of our resume under the interest portion. I once had an interview where I spent 30 minutes talking about Bob Barker and the Price is Right because I have “game shows” listed as an interest.    

Spinning Your Background Story
The great thing about you story, you can frame it how you want to. Are you going into the interview with non-finance experience? Similar to “bankifying” your resume, you need to be able to connect your story to the banking job you are applying for. Turn your experience’s associated weakness into a strengths.

  • Engineering - Focus on your communication skills
  • Arts and Science or Lawyer - Explain your analytical attributes
  • Pre-Med - Demonstrate how you’re outgoing
  • Corporate Finance/Sales/Consulting - Have the work stamina

On the other hand, if you have worked in banking, your interview will be monopolized by questions about your deal experience. Spend time creating a list of projects you worked on, your impact, and the outcome.

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.