By Anupreeta Das, Randall Smith and Aaron Lucchetti
Of THE WALL STREET JOURNAL
Wall Street revved into high gear Friday preparing to sell Facebook Inc. But while riches await the company's owners, the deal won't prove anywhere near as lucrative for banks.
Facebook executives including finance chief David Ebersman began a tour of Wall Street banks Friday morning, starting with a visit to Morgan Stanley's midtown headquarters in Manhattan at 8 a.m., people familiar with the matter said.
The roughly hourlong meeting with a group of sales people at the bank was described as low-key, and on their way out, the executives were escorted via a less-used entrance to avoid television camera crews that had set up.
By contrast, the scene at J.P. Morgan Chase & Co.'s Park Avenue headquarters, where Facebook executives had a meeting at 9:30 a.m., involved more fanfare. There were greeted outside the building by a blue-and-white Facebook flag as well as a sign that read, "J.P. Morgan welcomes the Facebook management." Two cutouts of thumbs-up signs-- the Facebook "Like" symbol-- hung from the windows. James B. Lee, Jr., the head J.P. Morgan banker on the deal, was seen escorting the Facebook team out of the building.
The executives then paid a visit to the downtown Manhattan headquarters of Goldman Sachs Group Inc.
As the lead managers, the three banks stand to gain handsomely from the deal. But many other banks involved in the IPO will fetch far less. And even when the social network becomes a public company, it may not bring the investment-banking community much business either.
Still, that hasn't stopped more than 30 banks from scrambling for a role in the mammoth IPO, which officially gets introduced to large investors starting Monday with the kickoff of a "roadshow." After about 10 days of meetings, the deal, expected to value Facebook at up to $96 billion, is supposed to begin trading under the symbol FB.
The main draw for most banks? Bragging rights, industry participants say. Many bankers reason that the prestige attached to Facebook's IPO outweigh costs, including below-average fees. "You get the ability to go to another company and say, 'we were on Facebook'," in hopes of winning future business, says one banker whose firm is on the deal.
Some say the mere ability to attend meetings where top Facebook officials give presentations offers chitchat value with other clients for years to come.
The fees certainly aren't much in all compared with other offerings. With banks eager to be attached to the deal, Facebook is paying only around 1.1% of the total IPO proceeds, people familiar with the matter said. That is nearly one-third of the 2.9% average industry fees for IPOs of American companies over $5 billion since 2000, according to Dealogic. The $20.1 billion offering of General Motors Co. in 2010, saw a lower rate as GM was government-owned at the time.
Some firms will enjoy real financial payoff from the Facebook deal. The top three managers-- Morgan Stanley, J.P. Morgan Chase & Co. and Goldman Sachs Group Inc.-- stand to reap significantly more in fees than the rest of the pack, with Morgan Stanley taking the largest chunk of what could be an estimated $150 million pie, people familiar with the matter said.
So-called passive managers who traditionally do little beyond providing research and selling a small portion of stock, in a situation like this could receive in the hundreds of thousands of dollars, industry experts say.
For the three main banks especially, there could be other benefits as well, including the ability to dole out hefty chunks of the coveted shares to clients. Other possible benefits include wealth management business from newly-minted, post-IPO millionaires.
On stock-trading desks, a big IPO can also bring additional trading volume to the lead banks several weeks before a deal, as institutional investor clients-- hoping to get a big chunk of the desired IPO-- try to curry favor with the banks by doing more trades, said Larry Tabb, founder and CEO of Tabb Group, a financial markets research and advisory firm.
"There is a halo effect," said Mr. Tabb.
But industry participants say the direct business benefits drop off rather fast for those in the lower echelons of the deal's banker ranks. And for some banks, participating could come at a price.
In addition to getting paid low IPO fees, most of the top 11 managers are helping to fund a $5 billion credit line and a $3 billion bridge loan. The loans, at a competitive rate, are meant largely to help Facebook pay withholding taxes on employee stock that will be awarded six months after the IPO if stock can't be sold then to cover the tax bill.
Wall Street bankers in and out of the Facebook IPO syndicate say given the current low-interest-rate environment, the cost of extending credit to Facebook can easily be greater than any anticipated fees from the IPO, especially if the bank doesn't have a strong credit rating.
UBS AG, the only major investment bank not engaged on the IPO, didn't commit to the loans. Its considerations included the cost of the credit commitment and the potential upside of involvement in this particular IPO, said people familiar with the matter.
As for the post-IPO world, it isn't clear that Facebook will offer Wall Street much advisory business, which is one way banks working on IPOs typically hope to win fees in later years. Facebook has shown no inclination to hire bankers for advice on acquisitions. It didn't use bankers for its recent deal to purchase Instagram for $1 billion. Nor did Facebook hire a bank to work on its purchase of $550 million of AOL Inc. patents from Microsoft Corp., according to a person familiar with the matter. A spokesman for Facebook declined to comment.
In this respect, Menlo Park, Calif.-based Facebook is following in a long tradition for West-coast technology companies. Behemoths such as Oracle Corp. and Cisco Systems Inc., among the industry's most acquisitive companies, rarely seek advice from investment banks when pursuing deals.
Oracle has paid only $70 million in M&A fees to banks since 2000, according to Dealogic. By comparison, other companies such as AT&T Inc. have paid $487 million for advisory over the same period. Apple Inc., with $110 billion in cash, isn't a busy acquirer, while Google Inc. buys dozens of companies a year but doesn't use bankers because the deals are tiny.
Even the benefits of potential wealth-management business can be limited.
Large brokerage divisions at banks have faced increasing competition in recent years from independent firms and registered investment advisers who tout a more personal touch and fewer potential conflicts of interest. One of the best weapons for a big bank against this onslaught is the access to "hot" IPOs.
Still, research firm Aite Group found in a survey last year that less than 2% of revenue at a bank's wealth management division came from referrals from the investment-banking business.
-Write to Anupreeta Das at firstname.lastname@example.org, Randall Smith at email@example.com and Aaron Lucchetti at firstname.lastname@example.org
--Vipal Monga contributed to this article.