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Facebook IPO Fees Not Really That Low

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The fees on Facebook’s initial public offering are not really as low as the stories about the deal setting a “new record low” might have you believe.

In the first place, as an absolute number, getting paid 1 percent of a $10 billion offering means you get $100 million. That gets split up between the various investment banks that will participate in the deal, with the largest piece going to the lead underwriters.

This means that Morgan Stanley, if it does wind up in the lead position, is likely to take between $20 million to $25 million in fees.

Over at DealBreaker, Matt Levine has a very good post about the economics of these deals. He points out that Morgan Stanley did 127 U.S. equity deals last year, with an average size of around $133 million and an average fees of around $5 million.

So getting paid $25 million for a single offering is a very big deal.

Levine goes on to point out that the costs of underwriting IPOs do not rise symmetrically with the size of the IPO. Small deals can involve a lot of due diligence and can be harder to sell to investors. Larger deals — such as this Facebook IPO — can be easier in part because everyone already understands Facebook's business model.

As Levine puts it:

Not always, lots of caveats, but the sheer execution pain involved in a merger among two huge public companies always seems to be dwarfed by that of a ($50 million) asset sale. Similarly a little IPO requires a team of bankers to learn about a little company, diligence the hell out of it to avoid selling fake trees or whatever, and then convince investors to learn about and buy it. Nobody needs to learn about Facebook. It’s Facebook! It learns about you!

It shouldn’t really be surprising that there are economies of scale in the IPO world. The fees at Wall Street firms actually bear this out. Smaller deals command fees as high as 7 percent, medium size deals typically come in a 6 to 5 percent, while deals of more than a billion dollars land in the 4 to 2 percent deals. The $15 billion General Motors IPO had fees set at less than one percent.

Let’s look at the internal economics of Morgan Stanley’s fees. Imagine it takes around 90 days from the time Morgan Stanley lands the lead role until the IPO. Working 15 hours a day every day — including weekends — Morgan Stanley would be charging a rate of more than $18,500 per hour. Let’s say that there are 30 people staffed to the deal — probably too high, but there are likely to be lots of lawyers in that number. That’s an hourly charge of $617 for each person.

In other words, a lot of the talk about the banks doing the deal for the sake of “prestige” is propaganda, meant to disguise the fact that the banks are making a ton of money off the deal.

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