5 reasons Facebook should go Dutch

By Richard Nieva, contributor

FORTUNE — How will Facebook’s mega IPO go down? The social networking giant will likely go public next spring with an anticipated evaluation of $80 to $100 billion, possibly raising some $10 billion. It could be the highest the tech world has ever seen.

Now, the company must decide how it can get top dollar for its debut. That may mean ditching the traditional book building process of hiring an investment bank to buy and allocate shares. It could follow a riskier path, cutting out the middleman and rounding up investors using a “Dutch” Internet auction where price is based on bids by investors. It’s not the right choice for every company, but may be perfect for Facebook. Here are 5 reasons why.

1. Facebook already has a lot of visibility, which puts it in the driver seat.
An auction works best for large, well-known companies. Having a recognizable consumer brand — one that needs no explanation of its service or how to use it — will almost definitely attract a large pool of investors. (Having some 800 million users and a feature film chronicling its rise doesn’t hurt.) “Only those companies are going to generate that much enthusiasm,” says Lise Buyer, founder of the IPO strategist Class V Group. Buyer was also part of the team that engineered Google’s (GOOG) IPO in 2004, the last high-profile Dutch auction. (Many considered that to be a mild success). She spoke only generally about auction IPOs, and declined to comment on Facebook specifically.

One perk of choosing a traditional bank over having an auction is having coverage by financial analysts bundled right into the deal, to make sure investors stay informed about the company once it’s on the market. But, a prominent company like Facebook doesn’t have to worry about any lack of coverage.

2. The company just might be bold enough to buck convention.
Lately Facebook has been asking the question, “What can Wall Street really do for us?” Since Google, only a handful of companies have taken the auction route, including online retailer Overstock.com (OTSK) and Chicago-based investment researcher Morningstar (MORN). Still, the vast majority of corporations don’t bother with making an already risky process even riskier. But Jay Ritter, professor of finance at the University of Florida, says Facebook is in a special league. “There is a small group of companies where the founder has a lot of skin in the game,” he says, referring to Facebook’s enigmatic CEO Mark Zuckerberg. “They are thinking outside of the box rather than following conventional wisdom.”

3. It can keep more of the proceeds.
For most companies that go public, the offering price will trade around or a little below the anticipated price on the first day. (Internet IPOs have popped in particular — including the recent listing of Jive (JIVE).) For a lucky few companies — around a quarter of them, according to Ritter — there is so much demand that they could raise the price higher than they originally planned when they filed. For a company like Facebook, where demand will likely be high, an auction means those proceeds can go right back to the company, and not to the investment banks or hedge funds.

4. An auction may yield a more committed investor.
Letting a bidder name her price may attract the kind of investor who has studied the company in depth and will meaningfully decide what she wants to pay, says Bill Hambrecht, founder of WR Hambrecht. That firm underwrote Google’s offering and helped pioneer the auction IPO system. “You don’t get the people expecting the first day hop,” he said. “You get longer-term shareholders.” That often means a company doesn’t get investors looking to flip the stock immediately. Hambrecht also only spoke about auctions generally, and declined to comment on Facebook specifically.

5. Facebook can learn from Google’s missteps.
Facebook has the luxury of studying a guinea pig named Google. Although it used an auction, the Mountain View, Calif., company still hired traditional investment banks Morgan Stanley (MS) and Credit Suisse (CS) to drive the process — to deal with logistics like SEC approval and holding investors accountable to paying their bids. According to Ritter, the University of Florida finance professor, those banks didn’t want the auction to be a wild success, in fear of changing the norm and making investment banks less relevant to the IPO process in the future. Facebook will still face this problem. Still, other factors that hurt Google had less to do with the decision between book building and auction. Most notably, Google’s roadshow — when the company delivers its pitch to a slew of possible investors — was tight-lipped and overly cautious, according to Ritter, in order to keep competitors like Microsoft (MSFT) in the dark. Facebook, who time and time again preaches openness and sharing (at least regarding its consumer product), might be more successful if it applies that culture to its IPO process.

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