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Comment by creamyhorror | Hacker News Reader

I like this quote from another CNet article on the Facebook IPO:

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In the case of Facebook -- whose T-shirt-wearing, 27-year-old chief executive, Mark Zuckerberg, is said to appreciate status updates more than stock brokers -- it's unlikely advisors will be able to command the standard rate.

"These Valley types think this whole process could be automated and they don't have to pay 7 percent to these flashy, French-cufflink-wearing Wall Street types," said Eric Jackson, founder and managing member of Ironfire Capital, a technology-focused hedge fund, who has interacted professionally with executives at Facebook and other social-media companies.

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I doubt the IPO process can be automated to any large degree (unless all the players somehow started thinking like engineers) but I'd sure be happy to see people try!

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IPOs don't have to be automated to end what is essentially price collusion by the investment banks on financing fees. It doesn't take that much more "work" by a bank to do an IPO for Facebook as it would for a company 1/50th the size. (I've worked on both size deals; the smaller ones are sometimes even worse because larger deals often have more seasoned professionals inside the issuer.) There are a lot of banks that would love to undercut the standard 5-7% IPO fee but they're afraid of being cut out of lots of other deals as punishment by the other banks.

Good for FB for questioning why banks still get 7% of new equity issues. It's highway robbery.

Nice insight there, and it makes sense. I guess the question is, are there good reasons for banking services to be so expensive, besides the inherent power advantages that the players possess? And if I may be allowed to repeat a common trope, all that wealth easily buys or wins the political influence necessary to keep the market regulations highly favorable to them.

50 or 100 years ago, there was real risk inherent in being an equity underwriter. IPO underwriters purchase the equity from the issuer and resell it to the market, and in theory that creates material risk that they might not be able to resell it at a profit. These days, they've pre-sold the equity (usually several times over) to institutional investors before they do the deal, so the risk is pretty minimal. Just look at the average first-day pop (something like 20%?) on large IPOs and you can see how little risk they're taking.

>I doubt the IPO process can be automated to any large degree

Why? What's so complicated about it?

Stocks generally don't trade on purely quantitative analysis, but on investor assessments of their 'story' and how that will play out over time. If you think corporations are going to invest in networking gear you look at Cisco et al. You inspect that universe for management (good or bad?) / product (great? promising new stuff? obsoleting?) / financial stories (leverage? balance sheet clarity?), and for valuation (P / E, enterprise value to EBITDA). If you think someone's valuation is low given the stories you believe, you buy.

For seasoned stocks a market consensus about the relevant stories emerge, and events within those stories drive the trading moves. People making money by being the first to adopt or drop stories.

But an IPO has no market-consensus stories of its own. So the book-building process involves explaining the company and getting market feedback on the credibility of that story.

Now this may or may not make sense. But it does give management some feeling of relationship with the market, by which they can hear what investors think and possibly influence those perceptions. Given the importance of stock price to most managements, it would be a very bold team that went forward without any perceived tool for managing the process.

I don't know much about it, but it does mainly seem to be about business and social relationships, due diligence, negotiation, accounting, and marketing with a compelling pitchbook or whatever they call it.

It doesn't seem so much like a target for automation so much as a target for "pro-competitive intervention" (which is very unlikely to happen).

From the other article on HN today it seems that they've tried to do some of that. They wrote their own pre-IPO prospectus and done the leg-work themselves on other things. It's not "automated", but it's cutting out a lot of what those finance companies would have done.

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