The list of banks which will cash in on the much-awaited Facebook (NYSE:FB) initial public offering (IPO) later this year grew longer late last week, with the hugely popular social networking company hiring Deutsche Bank (NYSE:DB), Credit Suisse (NYSE:CS) and Citigroup (NYSE:C) to work on its IPO.  This brings the total number of underwriters and managers for the mega-IPO to 9, with Morgan Stanley (NYSE:MS), JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC), Barclays (NYSE:BCS) and Allen & Co. already committed to do their part. Undoubtedly, the first question that pops up is “Why does Facebook need so many banks working on its IPO?” The answer is, it doesn’t. What it does need, however, are the lines of credit that these banks are willing to extend to the company, and being a part of the IPO is just a sweetener for the banks. Our analysis suggests a valuation of about $74 billion for Facebook, compared to rumors of a $100 billion+ valuation.
Facebook intends to raise at least $5 billion from the market on the strength of a rumored $100-billion+ valuation, which one would think would be more than enough to recruit the likes of Morgan Stanley, JPMorgan and Goldman Sachs to manage the IPO. These investment banking stalwarts were handpicked by Facebook to act as the lead, second and third underwriters respectively and will stake the largest claim to the proceeds from the IPO.
But Facebook has other business with banks besides the IPO; while the company’s IPO promises to break valuation records among internet companies, it also wants to secure additional credit for future use. The company is likely staring at a significant tax obligation when its employee stock options are vested after the IPO.  And it is wisely preparing a deep pipeline to ensure that it has enough cash once that happens.
Its original underwriters and managers (other than Allen & Co.) granted Facebook a credit line of $2.5 billion. And the three new banks have doubled that figure for Facebook. Looks like a win-win for everyone involved, as banks who won’t be making much directly from the IPO can be content with the multi-billion dollar loan Facebook would potentially draw from them in the near future. And from what we see, Facebook looks like a name even the banks can bank on.Notes:
- Facebook Adds Deutsche Bank, Citi, Credit Suisse on IPO, Increases Credit, Bloomberg, Mar 3 2012 [↩]
- Exclusive: Facebook seeking bigger credit line, Reuters, Mar 2 2012 [↩]