Facebook, which plans to make a market debut this month that could value it at $86 billion, is the stock that everyone seems to want.
If you are a small investor, lots of luck. Typically, shares of the hottest initial public offerings go almost entirely to the biggest clients of the Wall Street banks that oversee the stock sale. And no I.P.O. is as big or as eagerly awaited this year as Facebook’s.
Yet there may be a sliver of hope. Facebook’s executives and underwriters have discussed raising the number of shares that will go to retail investors, say people briefed on the matter who were not authorized to speak on the record. It is not known how much will eventually go to these mom-and-pop investors, but Wall Street executives estimate that the retail share could be as much as 20 to 25 percent of the offering. Some of that increase is likely to go to brokerage firms like TD Ameritrade or E*Trade , which cater to small investors.
On Thursday, Facebook
The company is seeking to give retail investors a bigger cut because it sees itself as a service created for, and driven by, consumers. One person briefed on the offering, who declined to be identified because of regulatory restrictions, said Facebook sees itself as “the people’s company.”
The excitement over Facebook’s offering has come on the back of its rapid growth. For many, Facebook is the Internet. Its number of active daily users now totals 526 million people. And after a flurry of headline-popping market debuts by other Internet start-ups — LinkedIn , Groupon and Zynga , among others — Facebook’s will be the biggest yet.
“I would love to get Facebook stock,” said Joseph Quigley, a 32-year-old insurance sales and marketing manager in Maryland. Mr. Quigley is an active trader, buying and selling stock worth several thousand dollars a year.
Like many others, he is pessimistic about his chances to invest in Facebook.
On Thursday, Facebook added E*Trade as one of its 33 underwriters — an indication that the company could seek to bolster its retail allotment — but it did not indicate how many shares the online brokerage firm will get.
“I remain skeptical that I could buy anything meaningful,” Mr. Quigley said.
The frenzy surrounding the Facebook public offering is reminiscent of the dot-com boom of the late 1990s, when investors clamored to get a piece of the next hot Internet company.
That system, it turned out, was fraught with abuses, including a practice known as spinning, which involved securities firms giving out valuable I.P.O. shares to executives in a bid to win their firms’ investment banking business. Regulators now bar this sort of quid pro quo behavior. Even as there have been changes, Wall Street still sends most of the prepublic offering shares it gets to big institutional investors like the mutual fund giants Fidelity and Vanguard.
How those shares are allotted is part of a choreographed series of events that takes place over several months before the market debut. A regulatory filing that describes the company’s business to investors starts the process. The company also selects a team of underwriters.
In the case of Facebook, the social networking giant tapped Morgan Stanley to lead the public offering, followed by JPMorgan Chase and Goldman Sachs .
In what is known as a road show, these underwriters take the company’s executives out to meet big institutional investors, who take the opportunity to quiz company executives. Demand to attend the Facebook presentations has been extraordinarily high, with underwriters already drawing up waiting lists for the meetings, according to two people briefed on the matter.
Facebook’s road show is expected to take place over the next eight to nine business days. Given that time frame, Facebook may begin trading on Nasdaq about May 17 or May 18.
After these meetings, investors will decide whether they want to place an order for shares, and for how many. Those orders are sent to the lead underwriters, who build a book of orders. This data is used to later allocate shares and set the price.
Depending on the size of the offering, Facebook will end up paying more than $100 million in fees to the underwriters. The firms that receive the most in underwriting fees typically get the biggest number of retail shares. In the case of Facebook, that is likely to be Morgan Stanley, which has a large network of brokers. Those shares are highly coveted and typically go to the firm’s top-producing brokers — and their best clients.
One Wall Street broker, who declined to be named, citing his firm’s policy against speaking to the media, said that financial advisers who specialize in initial public offerings will also be at the top of the list of brokers getting a Facebook allocation. Certain brokers, he said, have a clientele that buys public offerings almost exclusively, and those clients often buy “a lot of dogs” to have a chance at getting in on an offering like Facebook.
James Palmer, head of equity capital markets origination in the Americas for the Swiss bank UBS , which is not one of the Facebook underwriters, said “best practice” is to allot shares to investors that have a history of holding shares, rather than selling them shortly after the public offering for a quick profit.
In the case of an Internet I.P.O., he said: “Branch managers should also look at whether the account holds high-growth technology stocks and is accustomed to that type of investment.”
It is not unheard-of for companies that have a lot of contact with the public to allot more shares to retail investors. For instance, Google in 2004 went public using an auctionlike process to sell its shares, a decision that allowed for bigger retail participation.
C. James Koch, the chairman of the Boston Beer Company , wanted his customers to have a chance at buying shares when his company went public in 1995. So he hung fliers on six-packs of beer that informed customers that they might be able to buy $500 worth of shares in an eventual public offering. He sold shares at two prices. Some went to his customers, who it turned out got a better deal than institutional investors. Customers paid $15 a share, compared with $20 for those who bought at the offering price.
Experts say that while the odds are stacked against the small investor, there is one surefire way to get shares: Friend someone in Facebook’s executive suite.
“It does come down to the firm,” said Matthew Rhodes-Kropf, a finance professor at Harvard University. “Facebook can say where the shares are going.”