The CSR Newsletters are a freely-available resource generated as a dynamic complement to the textbook, Strategic Corporate Social Responsibility: Sustainable Value Creation.

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Monday, February 6, 2012

Strategic CSR - Facebook

The articles in the two urls below comment on the lead up to last week’s announcement by Facebook’s of its upcoming IPO (expected in May and announced last Wednesday).

The goal of both articles was to influence the debate surrounding the firm’s route to market. While a ‘traditional’ IPO is most often chosen (i.e., relying on investment banks to guide the firm to market), both articles focus on the potential value of alternative models—value, that is, both to Facebook and in terms of broader reform of the financial market.

The article in the first url below (from last December) focuses on the high-profile nature of Facebook’s IPO. This prominence, the author argues, will cause intense competition among investment banks to win the contract, which presented the opportunity for meaningful reform had Facebook chosen an alternative route to market. In particular, rather than pay unnecessary fees to an investment bank, the author argues that Facebook should have organized its own IPO:

Mr. Zuckerberg has two options: a traditional IPO, in which banks distribute shares to investors in exchange for a percentage of total proceeds; and the little-used ‘Dutch auction’ that cuts out the Wall Street middlemen by making the allocation of shares dependent on prices bid by each investor.

There are two main reasons why the author felt Facebook’s IPO suggests the possibility for an alternative to the traditional model. First, one of the main functions performed by investment banks in preparation for an IPO is to raise awareness of the firm. To say the least, ‘awareness’ is not a problem Facebook faces, which raises the question of how the banks will earn their expected commission from the launch:

By virtue of its size, business model and popularity, Facebook is the rare company that doesn't need Wall Street to go public. It should press home the advantage and blaze a trail for others to follow.

Second, with more than 800 million active users (200 million in the U.S.), Facebook is so big and such an important IPO that, by pursuing a different kind of model, the firm would have made a strong statement about the traditional IPO that may have resulted in reform:

The biggest difference between the two systems, apart from the lower fees paid by companies in auctions, is that when IPOs go Dutch, banks don't choose who gets shares, giving all investors a fair shake and avoiding potential conflicts of interests. This is particularly important for "hot" IPOs, like Facebook. Since these deals often record sharp rises in the first days of trading, there is a temptation for banks to dole out shares to their favorite investor clients, who stand to profit if they get in early.

The article in the second url below (from last week) reinforces the precedents of alternative IPO models that Facebook could have chosen to emulate:

Quirky, pioneering companies have long viewed the initial public offering process not only as a chance to raise money but also as an unparalleled PR opportunity—the ultimate expression of their values. In the 1980s ice cream makers Ben Cohen and Jerry Greenfield offered stock to their Vermont neighbors and to the local dairy farmers who were supplying them with milk. In 1995, Boston Beer, the maker of Samuel Adams, announced via ads on its bottles that any loyal drinker could buy into the company at $15 a share. Most famously, in 2004, Google tried to dilute the influence of the big investment banks and ran a so-called Dutch auction, letting prospective investors collectively set the price by submitting blind bids for shares.

Although the article recognizes that these different models have a varied success record, it claims that Facebook was well-positioned to learn from their past mistakes. And, seemingly more important than technical efficiency (IPO share prices are often underpriced, after all), was the potential for the firm’s decision to reform the system in a positive way. Given Facebook’s size and prominence, it was well-placed to buck the IPO trend. Instead:

Facebook appears to be preparing for an entirely conventional IPO, with none of the egalitarian aspirations that characterized those offbeat offerings of the past. By bringing in some of the country’s biggest and most recognizable banks to manage the IPO, Facebook has not only guaranteed those institutions a huge payday; it has also aligned itself with Wall Street at a time when public hostility toward the financial establishment is higher than ever.

Since Facebook’s announcement last week, I have seen other articles (such as this one in the Wall Street Journal, http://online.wsj.com/article/SB10001424052970203889904577200771850542822.html) bemoaning the missed opportunity by Facebook to advance the “democratization of the IPO”:

All this may explain one disappointment in Facebook's IPO filing, the company's apparent decision not to take advantage of an electronic platform that would let its U.S. members participate in the IPO via a Facebook app. The technology exists and has credible backers on Wall Street. The Securities and Exchange Commission has been consulted. Tens of millions of Facebookers might have enjoyed a front-row seat for one of capitalism's most hopeful spectacles, the public flotation of a young company.

Take care
David


Instructor Teaching Site: http://www.sagepub.com/strategiccsr/
The library of CSR Newsletters are archived at: http://strategiccsr-sage.blogspot.com/


Facebook’s $10 Billion Question
By Francesco Guerrera
December 13, 2011
The Wall Street Journal
Late Edition - Final
C1

Facebook, Wall Street: Friends with Benefits
With its long-awaited IPO filing, Facebook has revealed the identity of the partner that will define it for years to come
February 01, 2012
Bloomberg Businessweek