By Joseph Lazzaro: Subscribe to Joseph's RSS feed
February 2, 2012 2:31 PM EST
Are you tired of a commerce environment in which it's "heads the banks win, tails the U.S. taxpayer loses (and pays)"?
Yeah, others are tired of it too. And here's one way the system can be changed: democratize Facebook's initial public offering. The IPO is expected to raise at least $5 billion for the company.
Further, the suggestion Facebook democratize the IPO represents a nod toward "big change" -- something yours truly typically doesn't favor, given that the stance here is very process-oriented. The "small change" outlook, or incrementalism, is a stance that owes much to graduate training, and probably to my cultural imprint, each of which favored measured, small change.
Facebook's IPO comes after "the great, big bank bailout" -- when the big banks were bailed out to save the financial system, but the typical person was not bailed out -- justifying a "big change" stance. Again, this position is not advocated lightly: one U.S. government dimension yours truly really likes is the one-third election of the U.S. Senate every two years. It's one of the least-publicized marvels in public policy because it thwarts big change, often the irrational kind. Both in the modern era, and before it, fierce, and sometimes irrational and ignorant political firestorms and fevers have withered, and become extinct because, while the political faction could hold sway over some voters over a two-year stretch, the faction wasn't substantive enough to retain a significant bloc of voters over a four-year or six-year stretch, preventing the faction from taking control of the Senate, and hence a major power lever.
Facebook's IPO: Good Time for Systemic Reform
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However, as noted, the bank bailout justifies "big change," not just small change, and Facebook's IPO would be a good start.
The reason? A change in the structure of Facebook's IPO would give the typical investor, the Average Joe, an opportunity to profit from what may become one of the best-performing IPOs of the decade. In other words, it would bring a modest amount of democracy to a decidedly undemocratic process.
A primer on the current IPO set-up: if no change is implemented, Facebook's IPO, which is being lead-managed by Morgan Stanley, J.P Morgan Chase, and Goldman Sachs Group, will likely turn out to be another guaranteed financial windfall for the big banks.
Every IPO is different, of course, but more than likely, the lead-manager banks will net a handsome fee (perhaps as much as $500 million) for coordinating the deal-- Wall Street calls it "underwriting."
These banks will then be given the opportunity to purchase shares of the stock at a set price, or at the offer price, and then have the opportunity to resell these IPO shares, after a given period of time. Some big banks may even receive an "overallotment" of shares, if demand for Facebook's shares at the IPO is strong.
Facebook's Stock Price Could Rise Substantially in First Few Trading Minutes
Again, every IPO is different and the factors that help determine whether an IPO is successful vary. The factors include business model, sector position, sector health, prospects for business success, and capital market conditions, among others. However, given Facebook's operational success to-date, it's likely that demand will be strong for the company's shares, which means the shares probably will rise substantially above the offer price on the first day of trading, and could remain above it, and head for the moon.
Moreover, that means those Facebook shares can serve as "plums" the big banks can -- you guessed it -- apportion out to their best clients. But understand the big banks' best clients generally are not typical investors or your Aunt Doris. Those best clients are typically ones that provide the big banks with a large amount of business, and, by extension, fee income.
Of course, under the existing system, the typical person can still get in on Facebook's IPO once the Class A shares that will have only one vote per share are priced and start trading. That is known as "aftermarket" trading. The smart money -- certainly the safer money -- concerns deals obtained at the offer price -- or before the aftermarket. The aftermarket contains decidedly higher risk, hence the advantage of getting the opportunity to buy shares at or close to the Facebook IPO offer price.
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