By Lauren Tara LaCapra
January 27, 2012 3:42 PM EST
Facebook's initial public offering is likely to set a new standard for how low investment banks are willing to go on advisory fees to win big business.
The world's largest online social network is expected to tap public markets for $10 billion in the coming months in an offering that will value the company at as much as $100 billion, according to sources familiar with the planned IPO. It will be one of the biggest U.S. market debuts ever, and a prized trophy for the investment bankers seeking to win lead advisory roles.
That has set up a fierce competition on Wall Street, particularly between the presumed front-runners Morgan Stanley and Goldman Sachs Group Inc., which may offer their underwriting services for as little as 1 percent of gross proceeds, bankers and industry observers said.
That would be far less than the 7 percent fees that small deals typically fetch or the 2 percent to 3 percent fees that large deals tend to command.
"The Facebook IPO will be iconic," said James Montgomery, CEO of San Francisco-based investment bank Montgomery & Co, which advises tech companies on mergers, acquisitions, and private placements.
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Facebook can easily negotiate a 1 percent fee for the entire group of investment banks that will peddle its shares, Montgomery said, "much to the chagrin of the underwriters."
Such a low fee is practically unheard of for investment-banking deals, apart from the offerings of bailed-out companies such as the General Motors Co., American International Group Inc., and Ally Financial Inc., which sold shares held by the U.S. government in the aftermath of the financial crisis.
But Facebook has several advantages that will allow the company to haggle for a lower fee: it will be an easy sell as hordes of investors are keen to jump on the social-media trend, and even a 1 percent fee would reap $100 million in revenue for investment banks, sending a lead adviser to the coveted No. 1 spot on IPO league tables.
"There's no other IPO like this," said Lee Simmons, a tech specialist at Dun & Bradstreet. "It's kind of the 800-pound gorilla for the tech sector."
The Wall Street Journal reported Facebook plans to file IPO documents with U.S. securities regulators as early as Wednesday, and that it is close to picking Morgan Stanley as the lead underwriter.
The typical IPO that raises less than $500 million incurs a 7 percent fee -- what's known as "the 7 percent solution." But as IPOs grow in size, the fee percentage shrinks.
Investment banks usually earn fees of 4 percent to 5 percent on IPOs of more than $1 billion, but deals from Silicon Valley tend to carry a premium. U.S. technology IPOs of at least $1 billion carried an average fee of 5.8 percent from 2000 to 2012, according to Thomson Reuters data.
In the case of Facebook -- whose T-shirt-wearing, 27-year-old CEO, Mark Zuckerberg, is said to appreciate status updates more than he does stockbrokers -- it's unlikely advisers will be able to command the standard rate.
"These Valley types think this whole process could be automated and they don't have to pay 7 percent to these flashy, French-cufflink-wearing Wall Street types," said Eric Jackson, founder and managing member of Ironfire Capital, a technology-focused hedge fund, who has interacted professionally with executives at Facebook and other social-media companies.
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