Will Morgan Stanley Remain "King of the Valley" After A $60+ Billion IPO Hit?August 22, 2012 @ 8:31 AM EST
Back in prehistoric tech days, the mantra of the IT manager was, “I can’t go wrong picking IBM”.
In more recent years, the cry of the hot tech pre-IPO CFO has been, “I can’t go wrong picking Morgan Stanley”.
But the chorus of: “Faceplant. Facebeat. Facebomb. Facebust. Flopbook. Fakebook.Muppet Bait. To Receive a Facial. To get Zuckered.” is not exactly what top execs at Morgan wanted or expected to hear three months after the Facebook IPO.
Especially when the business press was fawning over their Silicon Valley win streak capped by FB, with CNNMoney saying at the time, “it gives Morgan’s technology investment bankers at least a decade’s worth of bragging rights.”
But, the purpose of this piece is not to make light of the sharp stock price drops for several recent tech IPO’s, including and most notably Facebook (FB).
Nor is it to unnecessarily knock Morgan Stanley and its role in said IPO’s.
But they might have some ‘splaining’ to do as MS approaches the next big Silicon Valley IPO target, fellow underwriters, large institutional funds, and individual investors.
The combined stocks of Facebook (FB), Groupon (GRPN) and Zynga (ZNGA), all brought out as IPO’s with Morgan Stanley (MS) in the lead role, have lost somewhere in the neighborhood of $60 billion in market cap as of last week. Zero Hedge has called the three “Morgan Stanley’s triangle of terror” and each IPO faces some serious litigation challenges.
It’s a bit hard to feel sorry for Morgan’s well-paid team, newly-minted tech billion- and millionaires, or burned high net worth investors. But it is easy to be sympathetic to small individual investors taking a hit and those funds which hold our 401(k)’s which bought with some measure of good faith into these recent IPO valuations.
But a little bit of history here about Morgan’s preeminence in Silicon Valley.
Back in 2011 and early 2012, the press was filled with reports of the competition for the prestigious Facebook IPO, with Morgan, Goldman Sachs (GS) and JPMorgan (JPM) as the primary players and several other less serious contenders. (The competition for listing exchange was going to be just as fierce between the NYSE and NASDAQ, but that is another story with its own ironic ending we all know).
In 2011, reports from Dealogic had Morgan Stanley’s share of the Top Internet IPO’s at a mind-boggling 75.4%, with Goldman a distant second at 7.0%. Reuters had a slightly different universe of stats, with Morgan Stanley ranked #1 on 16 of 37 new tech issues.
And the business press continued to give glowing reviews to what Reuters characterized as “the strong relationships Morgan Stanley’s lead tech banker Michael Grimes and his team have crafted over the years with deep-pocketed venture capitalist firms and executives in the San Francisco Bay Area”.
As recently as late June, MS analysts were joined by those from fellow underwriters JPM and GS in what seemed to be almost universal “buy” or “overweight” ratings for FB even as the stock stumbled out of the gate. The WSJ Deal Journal called the analyst reports “gushing”.
So, what is the CFO of the “next big thing” to make out of all of this?
Supporters of MS point to successes with GOOG and LNKD and many others. The obvious “bad luck” of the NASDAQ tech problems offers others a reason to give MS something of a qualified pass on this one, especially given the unprecedented size of the FB offering, the unique history of the secondary market trading in FB, and the “untested nature” of a huge social media offering. Others give a left-handed compliment, saying “most everybody else had an equal chance of screwing up”. And the support Morgan gave to the stock in the early days, whether well-founded or not, hardly went unnoticed.
Critics cite Morgan’s “imperial attitude” during the process, lack of consultation with other underwriters, the allegations over “hiding material information” in the days before the IPO, the pricing, the offering size, and now even the structure of the “lock-ups”, the first of which concluded last week.
So, what are the next Silicon Valley CFO’s and management teams to conclude?
According to Reuters, which interviewed several anonymous tech execs and rival investment bankers, the consensus was MS will take a reputation hit but nothing it can’t bounce back from quickly.
“There’s a little bit of a tarnish on the Morgan Stanley brand versus where they were…. But is it going to prevent them from being picked? I don’t think so.”
One of Reuters’ conclusions is that “companies could solicit advice more frequently and carefully from all their major underwriters, not just the bank in the prime position, known as ‘lead left’ – a term for the underwriter on the top left-hand side of the IPO prospectus.”
But putting Morgan Stanley aside for a minute and focusing on that $60 billion market cap hit, we think Time Business made a pretty strong if somewhat obvious point in a recent piece:
“The extreme contrast between the massive insider cash-outs at Facebook, Zynga and Groupon and the shockingly bad performance of each company’s stock makes the IPO process look bad. And that could have a chilling effect on a crucial function of our capital markets — the ability for truly-promising young companies to raise capital from the public.”
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