Why Facebook's IPO pricing is so clever

Facebook CEO Mark Zuckerberg in September 2011. Justin Sullivan/Getty Images

(MoneyWatch) COMMENTARY Facebook's disclosure today that it is pricing its IPO at $28 to $35 a share yields a company valuation of roughly $80 billion to $95 billion.

The pricing is brilliant strategy, although more on the part of Facebook's lead investment bankers for the offering -- Morgan Stanley (MS), J.P. Morgan (JPM), and Goldman Sach (GS) -- than on the company itself. It sets the scene for a big payday for Facebook and the social networking firm's original investors, with plenty of upside for the institutions that buy big blocks of stock and then sell it investors.

Who is unlikely to make money? The individual investors who line up for their share after the big dogs have supped.

Facebook prices IPO at $28 to $35 billion a share5 investor questions for the Facebook roadshow

The IPO's pricing is crucial. Facebook's projected valuation is significantly less than the at least $100 billion figure that has been tossed around by analysts and pundits. Facebook's stock now appears to be reasonably priced. That sets everything else in motion.

According to the latest SEC filing, Facebook itself will sell 180 million shares of stock. At $35 a share, that's $6.3 billion into the corporate coffers. That may not qualify as Apple (AAPL) or Google (GOOG) rich, but it would leave the company with plenty of cash to push forward with its strategy.

The selling stockholders -- which could include venture capitalists, investment bankers, people who privately bought stock on secondary markets, and even investors like Microsoft (which owns 1.6 percent of Facebook) -- are making 157.4 million shares available for sale. That's $5.5 billion at the $35 high end price.

Those shares go to the institutional investors and investment bankers that buy blocks of shares. Given the hype around the IPO, expect Facebook's share price to see a big bump when it starts trading, at least on the first day. Remember that LinkedIn (LNKD) priced its shares at $45 for its 2011 IPO and saw the stock soar to nearly $93 within hours. Facebook is a much hotter company than LinkedIn was. The chances of its shares hitting $70 or more seem likely.

  • Erik Sherman On Twitter»

    Erik Sherman is a widely published writer and editor who also does select ghosting and corporate work. The views expressed in this column belong to Sherman and do not represent the views of CBS Interactive. Follow him on Twitter at @ErikSherman or on Facebook.

Comments

CBSN Live

pop-out
Live Video

Watch CBSN Live

Watch CBS News anytime, anywhere with the new 24/7 digital news network. Stream CBSN live or on demand for FREE on your TV, computer, tablet, or smartphone.