The Role of Underwriters in Facebook's IPO: Why 31 and Not Fewer?
Facebook's decision to involve 31 underwriters in its Initial Public Offering (IPO) may seem like an overkill to some. This cynical approach was inspired by a larger box of cynicism bought at Costco. In truth, the answer lies in the complex and strategic nature of an IPO. Let's dive into the details of the underwriting process and explore why 31 underwriters are necessary.
Why 31 Underwriters?
One obvious reason for using 31 underwriters is to spread the wealth and buy some friends in the financial community. Another factor is that the IPO could be completed with only 5 to 7 underwriters. However, 31 underwriters still represent a significant number, reflecting the scale and complexity of the deal.
Breaking Down the Underwriting Team
Major underwriters in this deal include Goldman Sachs, JPMorgan Chase, Morgan Stanley, Bank of America Merrill Lynch, Credit Suisse, and Nomura (for Asia). These institutions are among the largest and most prestigious in the investment banking world.
These underwriters can help cover approximately 80% of the major investment funds, including pension funds, college endowments, and large hedge funds. By diversifying the underwriting team, Facebook ensures a wide distribution and a higher chance of successful market penetration.
The Role of an Underwriter
The primary role of an underwriter, such as Goldman Sachs in this case, is to purchase stock directly from the issuer, Facebook, and then sell it to their clients at a predetermined price. This price is agreed upon in advance, and the underwriters are responsible for finding initial buyers, typically their clients, who hope that the stock will perform well in the open market.
In a firm commitment underwriting, the underwriters agree to purchase the stock from the company regardless of whether they have buyers lined up. They do not purchase the stock to hold it for a profit but to facilitate the sale to the market.
The IPO Process and Strategic Underwriting
Facebook's use of 31 underwriters is strategic for several reasons:
Market Reach and Distribution: The offering is very large, requiring a significant number of firms to find enough buyers and ensure wide distribution.Strategic Collaboration: Underwriters are chosen based on their ability to tap into different client bases, ensuring a diverse and robust market penetration.Diverse Expertise: Different underwriters bring unique expertise and networks, which can be leveraged to ensure a successful IPO.Key Takeaways
Understanding the role of underwriters in an IPO is crucial for anyone involved in or closely monitoring the process. Facebook's decision to use 31 underwriters underscores the complexity and strategic nature of such an offering. By leveraging a diverse and extensive network, Facebook is setting itself up for a successful market debut.
Disclaimer: This article is not intended to replace professional legal advice. Always consult with a licensed attorney before taking any actions that may affect your rights and interests.