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Questions and answers on blockbuster Facebook IPO

- Associated Press - Friday, May 18, 2012

NEW YORK (AP) - Taking a company public isn't as simple as collecting Facebook friends.

Even if the company is Facebook.

When its stock started trading Friday under the symbol FB, buyers quickly bid the price up 6 percent. Yet by the time trading ended at 4 p.m. Eastern time, Facebook's stock had squeaked out a gain of just 23 cents above its initial $38 offering price.

Even at that price, the 8-year-old social media company is worth $104 billion, more than such giants as Disney and Kraft. The stock riches that flowed to Facebook and its early investors totaled nearly $16 billion.

As with any initial offering, Facebook's IPO follows lots of negotiation _ over price, paperwork, selling and buying. Here are some questions and answers about its public debut:

Q: So why did Facebook go public?

A: For the same reason many other fast-growing companies do: to raise money. Selling stock to the public gives companies money to run their businesses, expand and buy other companies. Sometimes companies go public even if they have no plans for the money. Facebook says it wants to establish a public market for its shares in case it needs to raise money from investors in the future.

Q: What happens in an IPO?

A: The company sells ownership stakes to the public for the first time. Facebook sold 421 million shares. That represented a 15 percent stake in the company. The sale raised $16 billion.

Q: Who owned Facebook shares before the IPO?

A: Well-connected investors, employees and top insiders like company directors. They sold 241 million shares, or more than half the total sold. The company sold shares at $38 each. At that price, those early owners pocketed $9 billion, or an average of $230 million each. The company will get $7 billion.

Q: Who bought the shares?

A: In an IPO, there are two buyers. The first are the investment banks that helped the company file IPO documents with regulators and contacted pension funds, mutual funds and other big institutions to gauge a price for the shares. These investment banks are called underwriters. In Facebook's case, 33 banks helped; Morgan Stanley took the lead role. The underwriters guaranteed the company that they would buy all the shares at the IPO price.

Q: When did the underwriters buy the shares?

A: Before the shares started trading publicly. Facebook's underwriters sold the sellers' shares Thursday night. But first, the underwriters had to negotiate a price with a second group of buyers _ the institutions that had promised to buy shares from them. They did that Thursday, settling on a price of $38.

Q: Is this negotiated price the IPO price?

A: Yes. But that's not what the underwriters paid the company and insiders. After settling on an IPO price, the underwriters subtracted a commission for their work. A document Facebook filed with regulators didn't say how much it would pay. But with big IPOs like Facebook's, the commission is typically 3 percent. At $38, this means Morgan Stanley and the other underwriters would get $1.14 off for each share. They'd pay $36.86 a share. Underwriters have five days to transfer the money to the company and other sellers.

Q: What do underwriters do with their shares?

A: They sell them to big institutions, along with some favored individual investors, before public trading starts. In Facebook's case, all the underwriters' shares were sold by Friday morning before the stock exchanges opened at 9:30 a.m. in New York.

Q: Why didn't Facebook begin trading then?

A: The new owners who want to sell their shares had to call their traders first. And the traders had to call "market makers" at the Nasdaq stock market, where Facebook's shares are listed. Market makers are firms that agree to hold shares in a company so buyers and sellers can easily trade them. The market makers determine a price between what most buyers and sellers are demanding. That took two hours on Friday morning, after which the first Facebook shares began exchanging hands.

Q: So Facebook is now worth more than $100 billion. What's that mean, exactly?

A: This is the company's "market value." It's what investors think the whole company would be worth if all its shares were trading. The 421 million Facebook shares sold in the IPO at $38 works out to $16 billion. Applying the same price to the rest of the shares yields $88 billion. Add the two figures, and you get $104 billion.

Q: Who owns the 85 percent of shares not sold in the IPO?

A: Top executives and directors collectively own nearly half. Mark Zuckerberg, the founder and CEO, holds 504 million shares _ about one-fifth of the shares that weren't sold in the IPO. At the IPO price, his unsold shares are worth $19 billion. Zuckerberg also controls special shares that give him 56 percent of voting rights on shareholder proposals.

Q: Did Zuckerberg sell in the IPO?

Yes, he sold 30 million shares, pocketing $1.15 billion. He said he sold to help pay taxes.

Q: How many shares do top executives and directors own?

A: Not counting Zuckerberg, they own 578 million shares, or nearly a quarter of the shares not sold in the IPO. David Ebersman, the chief financial officer, owns 2.4 million shares worth $91 million at the IPO price. Sheryl Sandberg, the chief operating officer, owns 1.9 million worth $72 million. Neither sold stock in the IPO. Among top executives, only Zuckerberg sold.

Q: What about other employees?

A: It's unclear in Facebook's IPO document how much of the company is owned by employees. The document disclosed only shares held by top executives. But it did list "restricted stock units" _ equivalent to 403 million shares _ given to staffers. If all the units are turned into stock, they'd be worth $15 billion at the IPO price. The company also has given staffers 117 million options convertible to shares. They're worth $4.5 billion at the IPO price. The options, plus the restricted units, represent 19 percent of shares. Most of the stock underlying the restricted units can't be sold for six months.

Q: Are there other selling restrictions for pre-IPO owners?

A: Yes, so-called "lock-up" periods, when old owners can't sell range from a month to a year. Mail.ru Group, a Russian internet company that sold $745 million worth of shares in the IPO, still owns 35 million shares. Those are worth $1.3 billion at the IPO price. The IPO document isn't clear on the precise amount. But the company can't sell those shares for a year. Maili.ru originally invested in Facebook in 2009.

Q: Are there other big early investors with unsold stock?

A: James Breyer and Accel Partners, a venture capital fund where he's a partner, invested in Facebook in 2005. They still hold 152 million shares worth $5.8 billion. In the IPO, they sold 49 million shares worth $1.9 billion.

Q: Who are the other early investors who sold?

A: Peter Thiel, the venture capitalist and a Facebook director, sold 17 million shares for $646 million. He had invested $500,000 in the company in 2004. That means he made $645.5 million in profit from his sale, before taxes and fees. He still owns about 28 million shares worth $1.1 billion. Another is DST Global Ltd., a London firm. DST and its affiliates sold 46 million shares, pocketing $1.7 billion. One of the earliest investors, Reid Hoffman, a co-founder of LinkedIn Corp. who invested in Facebook in 2004, sold stock worth $36 million. Other sellers include Goldman Sachs. It got $1.1 billion for its shares.

Q: Where does Facebook IPO rank among IPOs?

A: In terms of money raised, it was the third-biggest U.S. IPO in history, edging out AT&T Wireless. That company's IPO in 2000 raised $10.6 billion according to Renaissance Capital, an IPO advisory firm. The biggest IPO was Visa Inc. in 2008. It raised $17.8 billion.

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AP Business Writer Barbara Ortutay in New York contributed to this report.

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