In today’s Forbes Markets Desk Video, Investing Editor Matt Schifrin and I discussed the anticipated Facebook IPO, what it means for the broader market, and what other companies -- including its potential underwriters -- have an interest in seeing the deal go well:
[forbesvid id="fvn/inidaily/forbes-markets-desk-facebook-road-to-ipo" showid="80"]
Facebook is expected to submit documents for a public offering to the SEC as early as Wednesday, but an S-1 filing is just the first hurdle to clear on the path from private to public.
Regulators will then review the submission for any disclosures that raise concerns, a recent example being Groupon’s custom-brewed accounting metrics that stripped out marketing costs and drew SEC scrutiny. If Facebook’s filing doesn’t raise any red flags the company can get on with the rest of its process, including deciding which exchange to list its shares on and which ticker symbol it will trade under.
While the size of the offering will be subject to change, IFR reported Tuesday that Facebook is mulling a $5 billion offering, smaller than the $10 billion deal that has been bandied about of late. The venue for the listing will likely be left blank in the initial S-1, but competition is surely fierce to win the social network's business.
The NYSE and Nasdaq have been in a tug-of-war for high-profile offerings for years, and the early returns in the social media space are relatively split. While the NYSE scored first with LinkedIn’s early 2011 offering, Nasdaq had a big fourth quarter with new listings from Groupon and Zynga.
Once all regulatory questions have been settled, and likely after a couple of updates to its S-1 to offer further details, Facebook's CEO Mark Zuckerberg, fellow executives and the underwriters picked for the deal – Goldman Sachs Group and Morgan Stanley are said to be battling for the coveted lead left-hand spot in the offering document – will likely go on a roadshow through a number of cities to meet with prospective investors and sell them on the social network’s deal.
All told, it will be at least a few months from this week’s expected filing to the day Facebook begins trading. For a frame of reference, it took Groupon and Zynga just over five months to go from filing to their debuts, while LinkedIn managed to speed to market in just slightly less than four months.
The key difference in those timeframes was the condition of the broader market. From LinkedIn’s January filing to its May 2011 IPO conditions were relatively stable and positive. By contrast, Gropuon and Zynga filed in June and July respectively, and pitched their offerings during a difficult span that included a U.S. debt downgrade, ongoing stress in Europe, high volatility and heavy losses for U.S. stocks.
For Facebook, a filing this week would come at a docile point for the market. Volume is light and volatility has dropped with the closely-watched VIX below 20 and the major stock averages posting a strong January as the Dow climbed 3.4%, the S&P 500 4.4% and the Nasdaq 8%. The market is always at risk of a downdraft, but if such conditions persist it would set up a friendly environment for a big IPO in a few months.
While trading on secondary markets has provided liquidity for some Facebook investors, demand from institutional investors and individual shareholders is likely to be high for a company whose IPO has been hotly-anticipated for years. Even a smashing Facebook IPO is not an all-clear signal for an entire market though, just as General Motors' $20 billion offering in November 2010 was not a reason to jump into the market with both feet.
Progress on the European debt front, continued growth gains in the U.S. and signals that China will avoid a drastic slowdown will go farther than any IPO in giving investors confidence, though a blockbuster offering from Facebook would certainly be a nice bonus if the market's upbeat start to 2012 continues for a few more months.