Everyone wants a piece of Facebook, so the company’s underwriters will likely exercise their option sell a “greenshoe” of up to 50.6 million additional shares, and Facebook will definitely increase its IPO share price range from between $28 and $35 to $34 and $38, I’ve confirmed with sources very close to the IPO. This means Facebook could sell up to 388 million shares to bring in between $13.1 billion and $14.7 billion at a CNBC-reported valuation between $92B and $103B.
A greenshoe is an SEC-permitted over-allotment option that can stabilize a stock’s price by allowing underwriters to sell up to 15% more stock than the company originally planned to sell, but with the option to buy back the stock at the offering price if the actual price drops below this. By exercising the greenshoe, underwriters including Morgan Stanley, J.P. Morgan, and Goldman Sachs could help Facebook bring in up to an additional $1.72 billion to $1.92 billion by selling up to 50.6 million shares, which could prevent high demand and limited supply from causing the share price to skyrocket and making the stock seem volatile.
“Quite likable indeed, har har” laughs some monocle-wearing banker on Wall Street.
The greenshoe option for underwriters was written into Facebook’s S-1 on May 3rd, but now one source has confirmed that underwriters will exercise the option and another said it was very likely. The S-1 states “We and the selling stockholders have granted the underwriters the right to purchase up to an additional 50,612,302 shares of Class A common stock to cover over-allotments.” Specifically that’s 6,029,988 shares directly from Facebook and 44,582,314 shares from the selling stockholders. That means the greenshoe could allow Facebook to raise an extra $204.6 million to $228.7 million.
The greenshoe is named after the first company, Green Shoe Manufacturing , to give underwriters the over-allotment option. Facebook could use the greenshoe to take advantage of stellar demand by selling more stock and raising more money. Alternatively, in the event that the share price falls below the offering price, Facebook’s underwriters could buy back all or some of that 15% at the offering price without losing money. In this way the greenshoe gives Facebook and its underwriters more control over the total pool of stock being traded and the price.
The fact that 526 million people use Facebook every day may have a lot to do with the strong demand for its stock. People around the world may be thinking to themselves “I can’t live without Facebook. It’s going to be around for a long time. I should invest.”
They may be right, at least about the first two parts. Facebook’s network effect is so strong that to be truly disrupted and fall from its place as the premier social network for everyone, another company would have to provide something much, much better than Facebook. Not just cooler features or faster apps or ties to search and other services (*cough* Google+ *cough*). But truly, revolutionarily better, and with a brilliant distribution strategy.
Whether that longevity makes Facebook a wise investment will depend heavily on its ability to make money on its mobile site and apps where it doesn’t currently show as many ads as its web interface. Its Sponsored Story in-news feed ads are a good start, but it will either need to show a lot of them or come up with another ad format or revenue stream. I wouldn’t be surprised to see Facebook introduce full-screen, glossy, old magazine-style ads mixed in between organic news feed stories and more subtle Sponsored Stories.
Investors will need to make their plans quickly. Facebook will likely update its S-1 filing with the SEC over the next few days to make the $34 to $38 price range official, and possibly note the greenshoe. On Thursday it’s expected to set the actual IPO share price. And on Friday it all goes down with CEO Mark Zuckerberg opening trading of his company’s stock by ringing the NASDAQ bell from Facebook’s headquarters at 1 Hacker Way, Menlo Park, Calif.
[Image Credit: Converse, Alamy. Updated body and headline to note May 3rd was specifically when greenshoe was written into S-1 and clarify that the news is that underwriters will exercise this existing option to sell 50.6 million extra shares]