Legendary Banker Bill Hambrecht on Facebook IPO: It Should Have Offered Users a Stake First

In January of last year, several days after it emerged that that Goldman was planning to allow its “high net worths” to invest in Facebook in a deal that would give it a $50 billion valuation, I wrote that the company’s pact with Goldman reeked. “For a company that prides itself on its connection to its users, Facebook’s decision to tie up with a bunch of millionaires is tone-deaf to the extreme,” I argued, suggesting that Facebook consider a Dutch auction as Google had for its 2004 IPO.

Evidently, Facebook never did, not really. Maybe the company had in mind the fact that Google had to reduce both the price of its IPO and the number of shares it planned to offer in the days leading up to its own offering — and that it was then apparently underpriced. Maybe Facebook felt it was too mature comparatively. Certainly, having raised $2.3 billion before its IPO, Facebook had a lot of heavy-hitting investors to make happy. After a point, it was likely incapable of gambling on so seemingly unorthodox an offering strategy.

Of course, in light of the epic mess that’s been unspooling since the company’s highly  “traditional” IPO offering last Friday, a Dutch auction might have proved the safer bet. At least, it might have been more equitable, agrees legendary banker Bill Hambrecht, who designed Google’s auction IPO, and who I caught up with earlier today in Palo Alto. Our conversation has been edited for length.

Before Facebook’s IPO, you declined to answer this question, but now that that it’s a done deal: Did Facebook ever reach out to you about the Dutch auction process? Did you ever reach out to the company?

Not directly. When we’ve analyzed who’s used the auction and why, they’ve sort of come to us. I mean, Larry Ellison put out an RFQ [in 2007] that said, ‘If you want to underwrite [Ellison’s on-demand software spin-off] NetSuite, it’s got to be an auction.’

There’s either a philosophical attraction to [Internet auctions] or else we get caught up in bakeoffs and presentations to the board, and those things, we finally decided, are a waste of time. So if there’s a philosophical acceptance of the auction, then we’re happy to talk. And in the case of Facebook, there was some of that. But by the time we got there, Morgan Stanley and Goldman had big ownership positions and they were deeply involved, so we just didn’t make a big effort, frankly.

That’s a shame. I’ve always felt like users should have had an opportunity to participate in the company’s upside. Unrealistically, up to the end, I thought they might do something toward that end, too.

They should have [done a Dutch auction]. They really should have. I really think what they should have done was a direct-to-customer base [offering] first, then done an auction. That would have been the way to do it. And by the way, I think other Internet companies are looking at that kind of thing.

Who could blame them, considering what just happened. Do you think Morgan Stanley screwed this up?

It depends on your point of view. The stock is down to what, $32? They clearly either overestimated the demand or were trying to be aggressive to please the company – probably a combination of both.

The problem that they have, and the reason we use an auction instead of the traditional system, is that so much of the demand that they see is from traders who really, all they want to do, is take it and flip it. And you have to separate that out from the real demand, and that’s hard to do. That’s why to me, an auction that’s based on hard orders – you’re going to the buyer and saying, ‘How many shares do you want to pay for and what price are you willing to pay?’ – [makes more sense].

I think it’s more a systemic problem than a problem that’s unqiue to Morgan Stanley. I think they probably tried hard and did the best they could. They’re good underwriters. I just think the system doesn’t work; you can’t separate out who’s real and who isn’t.

Do you think the IPO was hurt further because so many institutional investors were already in the deal?

Well, in a way, this wasn’t really an IPO. There was significant price discovery available in the SecondMarkets of the world. So in a way, it wasn’t the same thing. And I think it’s interesting that today’s price is where a lot of the trading took place six months ago.

Several reports emerged this morning that several analysts at the banks that underwrote Facebook, including Morgan and Goldma, reduced their revenue forecasts the week of the roadshow. Did you see that news and what did you make of it?

I think it’s pretty gutsy. It shows that they’re serious analysts. I can’t imagine that was easy to do. I don’t know the details, though.

Do you anticipate an uptick in demand for auction services like yours because of this colossal mess?

We’re taking a lot of meetings; we’ll see. We have one company in registration but we’ve done very little [in recent years] because the IPO market has been very dead.

Are you still committed to W.R. Hambrecht and the auction process generally?

I’m very committed to this business and I think we’ll see significant offerings.

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